CIHM 

Microfiche 

Series 

({Monographs) 


ICIMH 

Collection  de 
microfiches 
(monographles) 


Canadian  Inatltuta  for  Historical  MIcroraproductlon.  /  Institut  Canadian  da  microraproductlons  hi.toriquas 


The  Institut 
copy  avails 
may  be  bibi 
the  image 
significant!; 
checked  be! 


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Technical  and  Bibliographic  Notes  /  Notes  techniques  et  bibliographlques 


jtute  has  attempted  to  obtain  the  best  original 
ailable  for  filming.  Features  of  this  copy  which 
bibliographically  unique,  which  may  alter  any  of 
iges  in  the  reproduction,  or  which  may 
ntly  change  the  usual  method  of  filming  are 
below. 

•loured  covers  / 
luverture  de  couleur 

•vers  damaged  / 
•uverturc  endommag6e 

ivers  restored  and/or  laminated  / 
luverture  restaur^e  et/ou  pellicul^e 

iver  title  missing  /  Le  titre  de  couverture  manque 

loured  maps  /  Cartes  g^ographiques  en  couleur 

loured  ink  (i.e.  other  than  blue  or  black)  / 
ere  de  couleur  (i.e.  autre  que  bleue  ou  noire) 

loured  plates  and/or  illustrations  / 
inches  et/ou  illustrations  en  couleur 

und  with  other  material  / 
IIS  avec  d'autres  documents 

ly  edition  available  / 
ule  Edition  disponible 

ht  binding  may  cause  shadows  or  distortion  along 
irior  margin  /  La  reliure  serr^e  peut  causer  de 
nbre  ou  de  la  distorsion  le  long  de  la  marge 
^rieure. 

ink  leaves  added  during  restorations  may  appear 
hin  the  text.  Whenever  possible,  these  have  been 
itted  from  filming  /  II  se  peut  que  certaines  pages 
inches  ajout^es  lors  d'une  restauration 
}araissent  dans  le  texte,  mais,  lorsque  cela  4tait 
isible,  ces  pages  n'ont  pas  ^t^  f  ilm^es. 

jitional  comments  / 
mmentaires  suppl6mentaires: 


L'Institut  a  microfilm^  le  meilleur  exemplaire  qu'il  lui  a 
6\6  possible  de  se  procurer.  Les  details  de  cet  exem- 
plaire qui  sont  peut-6tre  uniques  du  point  de  vue  bibli- 
ographique,  qui  peuvent  nrK>difier  une  image  reproduite, 
ou  qui  peuvent  exiger  une  modifk:ation  dans  la  m^tho- 
de  normale  de  filmage  sont  indiqu^s  ci-desscus. 

I     I  Coloured  pages  /  Pages  de  couleur 

I I   Pages  damaged  /  Pages  endommag6es 


D 


Pages  restored  and/or  laminated  / 
Pages  restaur^es  et/ou  pellicul^es 


r~~k  Pages  discoloured,  stained  or  foxed  / 
h/Lj   Pages  d^olor^es,  tachet^es  ou  piqu^es 

Pages  detached  /  Pages  d6tach6es 

[/     Showthrough  /  Transparence 

I      I   Quality  of  print  varies  / 


D 
D 


D 


Quality  indgale  de  I'impression 

Includes  supplementary  material  / 
Comprend  du  materiel  suppl^mentaire 

Pages  wholly  or  partially  obscured  by  errata  slips, 
tissues,  etc.,  have  been  refilmed  to  ensure  the  best 
possible  image  /  Les  pages  totalement  ou 
partiellement  obscurcies  par  un  feuillet  d'errata,  une 
pelure,  etc.,  ont  ^\6  filmies  h  nouveau  de  fa9on  k 
obtenir  la  meilleure  image  possible. 

Opposing  pages  with  varying  colouration  or 
discolourations  are  filmed  twice  to  ensure  the  best 
possible  image  /  Les  pages  s'opposant  ayant  des 
colorations  variables  ou  des  decolorations  sont 
film^es  deux  fois  afin  d'obtenir  la  meilleure  image 
possible. 


I  filmed  at  the  reduction  ratio  checked  below  / 

!nt  est  tWmi  au  taux  de  reduction  indiqui  ci-dessous. 


14x 


18x 


12x 


16x 


20x 


22x 


7 


26x 


30x 


3 


24x 


28x 


32x 


Tha  copy  fiimtd  h«r«  Hm  b««n  raproducad  thanks 
to  tha  ganareaity  of: 

National  Library  of  Canada 


L'axamplaira  film4  fut  raproduit  grica  A  la 
g«n4roait*  da: 

Bibliothiqua  nationala  du  Canada 


Tha  imagaa  appaaring  hara  ara  tha  bast  quality 
possibia  considaring  tha  condition  and  lagibility 
of  tha  original  copy  and  in  koaping  with  tha 
filming  contract  spacifications. 


Las  imagas  suivantas  ont  tti  raproduitas  avac  la 
plus  grand  soin.  compta  tanu  da  la  condition  at 
da  la  nanat*  da  Taxamplaira  film*,  at  an 
conformity  avac  laa  conditions  du  contrat  da 
filmaga. 


Original  copias  in  printad  papar  covars  ara  filmad 
baginning  with  tha  front  eovar  and  anding  on 
tha  last  paga  with  a  printad  or  illustratad  impraa* 
sion.  or  tha  back  eovar  whan  apprepriata.  Ail 
othar  original  copias  »r9  filmad  baginning  on  tha 
first  paga  with  a  printad  or  illustratad  impras* 
sion.  artd  anding  on  tha  last  paga  with  a  printad 
or  illuatratad  imprassion. 


Laa  asamplairas  originaux  dont  la  eeuvanurs  sn 
papiar  aat  imprimOa  sont  filmSs  tt  commancant 
par  la  pramlar  plat  at  an  tarminant  soit  par  la 
darnitra  paga  qui  comporta  una  amprsinta 
d'imprassion  ou  d'illustration,  soit  par  la  sacond 
plat,  saion  la  cas.  Tous  las  autras  aaamplairas 
origirtauK  sont  filmis  an  commandant  par  la 
pramlAra  paga  qui  comporta  una  amprainta 
d'imprassion  ou  d'illustration  at  an  tarminant  par 
la  darniira  paga  qui  comporta  una  talla 
amprainta. 


Tha  last  racordad  frama  on  aach  microficha 
shall  contain  tha  symbol  -^  (moaning  "CON* 
TINUED").  or  tha  symbol  ▼  (moaning  "END"), 
whichavar  applias. 


Un  das  symbolos  suivants  spparaitra  sur  la 
darniira  imaga  da  ehaqua  microficha.  salon  la 
cas:  la  symbolo  — »  signifia  "A  SUIVRE  ".  la 
symbolo  ▼  signifio  "FIN". 


Maps,  platas,  charts,  stc.  may  ba  filmad  at 
diffsrant  raduction  ratios.  Thosa  too  larga  to  ba 
sntiraly  includad  in  ona  axposura  mrm  filmad 
baginning  in  tha  uppar  lafi  hand  cornar.  laft  to 
right  and  top  to  bonom.  as  many  framas  as 
raquirad.  Tha  following  diagrams  illustrata  tha 
mathod: 


Las  cartas,  planchas.  tablaaux,  ate.  pauvant  atra 
filmis  i  daa  taus  da  reduction  diffOranis. 
Lorsqua  la  documant  ast  trap  grand  pour  Stra 
raproduit  an  un  saul  ciichO.  il  ast  films  S  partir 
da  I'angla  supAriaur  gaucha.  da  gaucha  *  droita. 
at  da  haut  mn  baa.  an  pranant  la  nombra 
d'imagaa  ndcassaira.  Las  diagrammas  suivants 
illustrant  la  mOthoda. 


1 

2 

3 

1 

2 

3 

4 

5 

6 

Miatocorv  ritoiution  tist  chart 

(ANSI  and  ISO  TEST  CHART  No   2) 


1.0 


I.I 


1.25 


1.8 


136 


1.4 


I 


1.6 


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THE  MACMILLAN  COMPANY 

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TORONTO 


THE    INCOME    TAX 

A    STUDY    OF    THE    HISTORY,    THEORY, 
AND    PRACTICE    OF 

INCOME    TAXATION 
AT   HOME   AND   ABROAD 


BY 


EDWIN   R.   A.   SELIGMAN 

McVlCKAR    PKOFESSOR   of   PolITlCAI,    KoiNOMY 

Columbia  University 


mttJ  gotk 

THE    MACMILLAN   COMPANY 
1911 

jf/l  rights  rtstrvtd 


207708 


COI'YRKJHT,    iqlt, 

»v   THK   MACMILIJ\N   COMPANY. 

S«t  up  and  elecirotyped.     PublUhcd  February,  19U. 


yettoooB  yrni 

•I.  8.  Ciishlns  Co.-  lierwlck  <k  Smith  Co. 

Norwood,  Um9.,  f.S.A. 


PREFACE 

The  present  vohime  was  begun  seventeen  years  apo. 
At  the  time  of  the  discussion  of  the  income  tax  which  cul- 
minated in  the  law  of  1894,  when  practically  nothing  had 
been  written  on  the  subject  in  this  country,  I  undertook  to 
make  researches  into  the  history  of  taxation  in  the  American 
colonies  and  states  which  might  th  row  light  ou  the  question. 
The  results  of  some  of  these  studies  were  published  in 
1894-5,  ^"'l  constitute  the  earlier  chapters  of  Part  II  of  the 
present  work.  I  proposed  at  the  time  to  continue  these 
studies  .ind  to  publish  a  bonk  on  the  general  subject.  The 
income  tax  decisions  of  i«9S,  however,  were  at  once  recog- 
nized as  putting  a  temporary  quietus  on  any  legislative  pro- 
gramme, and  I  turned  aside  from  the  project  until  the  time 
should  seem  more  propitious.  The  renewed  agitation  look- 
ing toward  *a  federal  income  tax  which  eventuated  in  the 
submission  of  the  Sixteenth  Amendment  afforded  this  oppor- 
tunity, and  accordingly  my  earlier  researches  have  been 
completed  and  brought  up  to  date,  with  the  results  hi;rewith 
presented.  As  it  seems  probable  that  we  shall  before  long 
have  an  income  tax  in  the  United  States,  my  chief  object 
in  writing  this  book  has  been  to  set  the  subject  in  a  some- 
what clearer  light  and  to  aid  the  legislator  in  constructing  a 
workable  scheme. 

It  may  appear  to  some  that  too  much  attention  has  been 
paid  to  the  historical  side  of  the  subject.  It  seemed  to  me, 
however,  that  the  most  important  lesson  to  be  learned  from 
experience  was  the  gradual  transition  in  public  sentiment 
from  a  position  of  uncompromising  hostility  to  one  of  virtual 
acquiescence.  Such  a  lesson,  however,  can  be  impressed 
only  after  a  full  and  thorough    presentation   of   the    facts. 


VI 


Preface 


This,  apart  from  the  inherent  interest  of  the  matter,  must 
be  my  excuse  for  attempting  an  exhaustive  statement,  not 
only  of  the  legislation  and  of  the  parliamentary  history,  but 
also  of  the  scientific  as  well  as  of  the  more  ephemeral  literature 
of  the  topic,  in  the  njost  important  countries  from  which  we 
have  a  lesson  to  learn.  In  this  investigation,  especially  so 
far  as  England  is  concerned,  virtually  no  help  was  secured 
from  any  existing  investigation,  and  I  have  therefore  been 
compelled  to  make  a  pioneer  study,  with  all  its  inevitable 
defects. 

Some  will  no  doubt  take  up  this  volume  in  the  hope  of 
securing  a  general  survey  of  the  question.  To  such  .  iders 
it  is  suggested  that  the  main  outlines  of  the  problem  will  be 
found  in  the  Introduction  and  the  Conclusion,  and  that  they 
may  do  well  to  confine  their  attention  to  these  portions  of 
the  work,  referring  to  Parts  I  and  II  only  in  so  far  as  they 
may  be  interested  in  securing  a  more  detailed  confirmation 
of  the  points  there  presented. 

So  much  help  has  been  afforded  by  friends,  both  at  home 
and  abroad,  in  scientific  as  well  as  in  official  circles,  that  it 
would  be  hopeless  to  attempt  any  record  here  of  my  indebt- 
edness to  individuals.  I  cannot,  however,  refrain  from 
acknowledging  a  deep  obligation  to  my  colleague.  Professor 
H.  R.  Mussey,  and  to  my  son,  Kustace  J.  Seligman,  for  the 
invaluable  assistance  *hey  have  afforded  in  the  dreary  task 
of  reading  the  proof. 


EDWI.N   R.  A.    SELIGMAN. 


Con  Mill  \  tNi\KKsiiv.  Nkw  York, 
l.iiiii.iry  lo,  191 1. 


fc--   .a^«i-^ 


TAlil.Ii    OF   CONIliNTS 


i 


INTRODUCTION 

THE    KUNrMMKNTAL   PKOHLKMS 

I  I.  The  DfVi'lopmcnt  of  the  Ni>rm  ol' Taxation 

$  2.  I'rnpirly  aN  a  Tc>*t  of  I'.Ktilly 

$  3.  Kx|MMiditurc  and  I'loiluct  as   r'--t-'  uf  I'.u  iilty 

i  4.  Income  as  a  Tent  of  K.itulty 

i  5.  The  Meaning  of  Inronu-    . 

$  6.  UilTiTt-ntiation  of  Taxation 

i  7.  Kxftnption  from  Taxation 

§8.  (Irailuation  of  T.ixation     . 

i  9.  The  Three  Types  of  I  ntoinc  Tax 


3 
6 

10 
15 
'9 

32 
25 
29 

34 


PART    I 
77//?  INCOME    TAX  ABROAD 

PRKFATORY    NOTE 

THE    INCOME  TAX    IN   THE   MIDDLE   AGES 

§  I.    Thf  Local  Ta;cs 

§  2.   The  General  or  State  Taxes 


41 

47 


BOOK   I 

THE  INCOME  TAX  IN  ENGLAND 

CHAPTER   I 

The  War  Tax.     1798-1816 


5  I.  The  Origin  of  the  Triple  Assessment 
§  2.  The  Act  of  1798  .  .  .  . 
§  V    I'itfs  Conversion  to  the  Income  Tax 

vii 


57 
65 

72 


»&-»  -^i  1  •jar^'^' « "VSi 


viii  Table  of  Contents 

fACI 

§  4-   The  Act  of  1799 78 

§  5.    The  Public  Attitude  toward  the  Income  Tax     ....  82 

§6.   The  Act  of  1803 gg 

§  7.   The  Act  of  1806 ,0, 

§  8.   The  Repeal  of  the  Income  Tax 106 

CHAPTER   II 

The  Income  Tax  on  Trial.     1842-1862 

§  I.   The  Interval.     1816-1832 ,,g 

§  2.    The  Unrest.     1 832-1842 122 

§3.   Peel's  Act  of  1842 '.  \ii 

§4.    The  Development  to  1 85 1 i-j6 

§5.    The  Select  Committee  of  I Sj I [^j 

§  6.   Gladstone's  Budget  of  1853 ,-q 

§7.    A  Decade  of  Quiet ,cr 

§  8.    The  Committee  of  1861 161 


CHAPTER    III 

The  Modern  Income  Tax  :  A  Half  Centi'ry  of  Achieve.m 

1862  191 1 

§  I.  The  Uneventful  Decade.     1862-1872 

S  2.  The  Growing  Permanence  of  the  Tax.     1874-1894 

•5  3.  The  Emergence  of  the  Newer  Problems.     l89J-l904 

§  4.  The  Dip.artmental  Committee  of  1904 

§5.  The  Question  of  Fraud 

§  6.  The  Select  Committee  of  1906  . 

§  7.  The  Adoption  of  Differentiation  in  (907 

§  8.  The  Adoption  of  Gradu.ition  in  1910 

§  9.  Conclusion 


ENT. 


167 

172 

181 
192 
196 
202 
207 
213 


BOOK  II 

THE  INCOME   TAX  OX   THE  CONTINENT 

CHAPTER   I 

(iKRMANY 

§  I.  The  Taxes  on  Product  and  the  Prussian  Class  Tax  of  1820 
§  2.  The  Movement  toward  the  Income  Tax  .... 
§  3.    From  the  Revolution  of  1848  to  the  Franco-Prussian  War 


223 
230 
236 


Table  of  Contents 


IX 


§  4.  The  Reform  in  the  Seventie*  and  Eighties 

§5.  The  Prussian  Income  Tax  of  1891 

§  6.  The  Spread  of  the  Movement  to  the  other  German  States 

§  7.  Criticisms  and  Amendments.     1900-1909 .         .         .        . 

§  8.  Conclusion 


rAGi 
243 

250 
258 
261 
270 


CHAPTER   II 
France 


§  I.  Preliminary 

§  2.  The  Revolution  of  1848 

§  3.  The  Franco-Prussian  War 

§4.  From  Gambetta  to  the  Pcrin  Amendment.     1871    1878    . 

§5.  From  Dauphin's  Dill  to  the  Extra-Parliamentary  Committee 

1887-1894  

§  6.  From  the  Extra-Parliamentary  Committee  to  the  End  of  the 

Century.     i894-i89<; 

§  7.  From  Caiilaux's  First  Ministry  to  his  Second.     1899-1907 

f  8.  The  Income  Tax  Hill  of  1907 

I  9.  The  Discussions  of  1907-1909 

§  10.  The  Provisions  of  the  Income  Tax  Bill  a.s  Adopted 

§  II.  Conclusion 


373 
278 

283 

288 

293 

300 
306 
3'o 
3'5 
32' 
32s 


CHAPTER  III 
Other  Cou.ntries 

§  I.  Austria 

§  2.  Italy  — The  Historical  Development 

§3.  Italy  — Tlic  Actual  Conditions 

§4.  Italy  — The  Question  of  Fraud 

\  5.  Switzerland 


329 
338 
345 
•352 
355 


PART   II 

THE  INCOME   TAX  AT  HOME 


CHAPTER  I 
The  Income  Tax  in  the  American  Colonies 


§  I.   The  Beginnings       .        .         .         . 
§  -     The  Development  in  New  England 


3«7 


Table  of  Contents 


The  Middle  and  Southern  Colonies 
Conclusion 


CHAPTER   II 
State  Income  Taxes 

\  I.  The  Survival  of  the  Colonial  Faculty  Tax 

(2.  The  Period  of  the  Forties 

i  3.  The  Civil  War         ..... 

(  4.  The  Recent  History  of  State  Income  Taxes 

i  J.  The  Outlook  for  the  Future     . 

I  6.  Conclusion 


CHAPTER  Ml 
The  Civil  War  I.vcome  Tax 


§1. 

§2. 

§3. 
§4. 

§5. 
§6. 

§7. 


The  Origin  of  the  Tax    .... 

The  Act  of  1862      .....* 

The  Act  of  1864      .         .         .         .         " 

The  Aftermath  of  the  War 

The  Contest  over  the  Retention  of  the  Tax 

The  Practical  Workings  of  the  Tax 

Conclusion 


APPE.VDIX 
The  Income  Tax  in  the  Coxfeueracy 

CHAPTER   IV 


PACE 

yn 
381 


388 

399 
406 

414 

418 

42s 


430 
435 
440 

449 
456 
469 
476 


482 


499 
508 
S18 


The  Income  Tax  of  1894 

§  r.  The  Origin  of  the  Tax 

§  2.  The  Discussion  in  Congress     ....  '         *     ,™ 

§3-  An  .-Vnalysis  of  the  Liw  .         ■...,' 

§  4-  The  .Alleged  Shortcomings  of  the  Law 

§  S-  The  Real  Defects  of  the  Law  .         -...'.  c->2 

§  6.  Conclusion      .        .  •        •        .     5. 

529 

CHAPTER   V 

The  Constitutionai.itv  of  the  Income  Tax 

§  I.   General  Considerations 

§        The  Economic  Meaning  of  Direct  Taxes  ..'!.'     5^? 


xs^ss/HiEmis^iSimjsamm, 


ViifT^'^i^SmS^i 


Table  of  Contents 


XI 


§  3.  The  Historical  Antecedents  of  the  Direct  Tax  Clause 

§4.  The  Introduction  of  the  Direct  Tax  Clause 

§  5.  The  Purposes  of  the  Direct  Tax  Clause   . 

§  6.  The  Constitutional  Meaning  of  Direct  Taxes  . 

§  7.  The  Use  of  the  Term  in  the  Constitutional  Convention 

§  8.  The  Earlier  Decisions  of  the  Supreme  Court    . 

§  9.  The  Income  Tax  Cases  of  1895        .... 

§  10.  The  Dissenting  Opinions 

5  1 1 .  The  Effect  of  the  Decisions 


VAGB 

540 

548 

555 

559 

564 

571 
576 

583 
586 


CHAPTER  VI 

The  Proposed  Sixteenth  Amendment 

§  I.  The  Origin  of  the  Amendment        ..... 

§2.  The  Meaning  of  the  Amendment 

§3.  The  Effect  on  the  Borrowing  Power  of  the  StPtes    . 

§  4.  The  Immunity  of  State  and  .Municipal  Bonds  from  Taxation 

§  5.  The  Question  of  Uniformity 

§  6.  Conclusion 


590 
597 
604 
615 
621 
626 


CONCLUSION 

A   PRACTICABLE  PROGRAAfME 

§  I.    Is  an  Income  Tax  Desirable  ?  .         .         .         . 

§  2.    Shall  the  Income  Tax  be  a  State  or  a  Federal  Tax  ? 
§  3.    How  shall  the  Income  Tax  be  Administered  ? 


631 
642 
658 


BIBLIOGRAPHY 


§!• 

England 

§2. 

United  States 

§3- 

Germany 

§4- 

France    . 

§5- 

Austria   . 

§6. 

Italy 

§7- 

Switzerland 

INDEX 


677 
686 
691 
694 
698 
699 
700 

701 


wM^r^^^^^^M^T. 


INTRODUCTION 


THE    FUNDAMENTAL    PROBLEMS 


^^^^^^'S?i^^^^^!^^^^^^ffi5^^^f^ 


^     'TPiv^r- 


i5?>T?^W!?^ISI?5?oSSS' 


■'Ji£S«:f^ffi.' 


THE    FUNDAMENTAL   PROBLEMS 
§  I.    The  Development  of  the  Nonn  of  Taxation 

Thk  income  tax  has  come  into  the  forefront  of  public  dis- 
cussion with  comparative  rapidity.  In  France  it  is  now  the 
centre  of  political  agitation.  In  the  United  States  it  is  loom- 
ing large  on  tlie  political  horizon.  In  Great  Britain  it  has 
only  recently  been  accepted  as  a  permanent  part  of  the  tax 
system,  and  imjjortant  problems  of  reconstruction  have  been 
occupying  the  centre  of  the  political  stage.  In  Germany  the 
success  of  the  Prussian  tax  during  the  last  two  decades  has 
engendered  a  strong  movement  in  its  favor  throughout  the 
remaining  commonwealths.  Among  the  smaller  states,  both  of 
liurope  and  of  other  continents,  many  have  already  adopted 
the  system,  while  others  are  preparing  to  adopt  it.  Every- 
where, in  short,  there  seems  to  be  a  trend  toward  the  income 
tax.' 

'  The  literature  in  English  on  the  subject  of  the  income  tax  is  exceedingly 
meaj;re.  liastahk-,  rtii'lic  i'innnce,  anil  H.  C.  ,\ilams,  Scieiue  of  Finance,  %w^ 
only  summary  accounts.  A  forthcoininf;  work  by  K.  K.  Kcnnan,  of  Milwaukee, 
cntitleil  liiionic  t'lixulion,  is  to  contain  an  arrount  of  existing  systems. 

In  (iermaiiy  good  summaries  will  lie  found  in  the  text-books  on  Finance  by 
Wagner,  G.hn,  Kuscher,  Stein,  and  lleckel.  The  best  special  book  devoted  to 
the  subject,  although  now  somewhat  anti<|uated,  is  th.it  of  Held.  This,  as  well 
as  the  more  recent  works  of  >Jeumann  and  I-'uisting,  will  be  analyzeil  later  in  the 
chapter  devoted  to  Oirmany. 

In  Krance  the  recent  active  discussion  of  the  subject  has  led  to  a  more  abun- 
dant literature.  Apart  from  the  general  text-books  on  Finance  by  Leroy-Heaulieu, 
Stourm,  and  Je/e,  which  contain  succinct  accounts  of  the  subject,  a  large  number 
of  special  volumes  have  recently  appeared,  .\mong  the  most  important  are  those 
of  Denis,  I'hilippc,  (laston-Ciros,  Ingenlileeck,  and  I.aristoy.  These  will  be  dis- 
cussed in  tlie  cha])ter  on  France. 

F"or  fairly  good  bibliographies  see  Fdith  M.  Phelps,  SeUftfJ  .irticles  on  the 
httoiiie  J'.i.x  wilJi  Sp,,i.il!\,fti\iuelo  Gi-tiiluation  unii  J.-xemJ'liin.  .Minneapolis, 
li»t>'i;  ;'n  1  A.  I',  r.  (iriliin,  AVAi/  list  of  Works  rclatins;  to  Taxation  of  iii/ieri- 
t,iii,et  ,111,/  ,1/'  /)h,'i!,-^.     W.ishinglon  (  Library  of  Congress),  1007. 


■Bm^y 


,  The  Itnomc    Tux 

Why  is  this  so  ?  What  is  the  explanation  of  this  essentially 
modern  phenomenon  ?  Tor  wluit  reason  are  the  fiseal  sys- 
tems that  have  so  well  served  their  lu.rposc  in  the  past  now 
everywhere  bcin-  brushed  aside,  and  being  replaced  or  sup- 
plemented by  the  income  tax?  What,  in  short,  is  the  real 
significance  of  the  movement  ? 

In  order  fully  to  comprehend  this,  it  would  be  necessary 
to  trace  the  development  of  taxation  and  to  study  the  fun- 
damental ideas  which   lie  at  the  basis  of  this  development. 
As  the  general  phase  of  this  development,  however,  has  been 
elaborated  in  another  place.'  it  will  be  necessary  here  oidy  to 
recall  the  broad  lines  of  the  evolutii>n.  and  to  remember  the 
process  through  which  voluntary  offerings  gradually  change 
into  compulsory  payments,  and  the  primitive  fees  and  tolls 
evolve  into  indi'rect  taxes,  to  be  followed,  only  at  a  much  later 
stage,  by  a  system  of  direct  taxes.     Without  going  into  the 
details  of  that  development,  we  may  be  i)ermitted  to  recall 
the  conclusion.     Amid  the  clashing  of  divergent  interests  and 
the  endeavor  of  each  social  class  to  roll  off  the  burden  of 
taxation  on  some  other  class,  we  discern  the  slow  and  laborious 
growth  of  standards  of  justice  in  taxation,  and  the  attempt  on 
the  part  of  the  community  as  a  whole  to  realize  this  justice. 
The  history  of  finance,  in  other  words,  shows  the  evolution 
of  the  principle  of  faculty  or  ability  to  pay  — the  principle  that 
each  individual  should  be  held  to  help  the  state  in  proportion 
to  his  ability  to  help  himself. 

Premising  a  general  acquaintance  with  the  main  lines  of 
fiscal  evolution,  what  interests  us  here  is  the  tracing  of  the 
fundamental  ideas  on  which  the  evolution  was  based.  In 
other  words,  taking  it  for  granted  — what  indeed  cannot  fail 
to  be  granted,  after  a  study  of  the  facts -that  there  has 
been  a^^rogrcssive  attempt  to  realize  the  demands  of  fiscal 
justice  and  a  more  or  less  unconscious  tendency  to  work  out 
the  principle  of  ability  to  pay.  the  question  presents  itself  as 
to  what  are  the  historic  forms  of  the  test  of  this  ability. 
Granted  that  in  some  more  or  less  rough  way  an  endeavor  is 


Sciigiiiin,  **.. 


th  ci!.  i  !9o;\  ijhap,  i. 


The  Fumiamental  Problems 


made,  almost  from  the  bc{.;inninK,  to  apporticm  public  burdens 
in  accordance  with  the  presumed  capacity  of  individuals  or 
classes,  the  problem  arises  as  to  how  the  cajiacity  to  bear 
this  burden  is  to  be  measured.  Ivven  where  it  is  difficult  to 
recognize  any  conscious  attempt  on  the  part  of  government 
to  carry  this  principle  into  practice,  and  even  where  actual 
fiscal  institutions  represent  more  or  less  thinly  disguised 
efforts  of  the  dominant  economic  class  to  roll  the  burdens  on 
the  shoulders  of  the  weak,  —  even  here  it  is  rare  to  find  a 
cynical  disregard  of  all  considerations  of  equity;  and  even 
here  a  more  or  less  successful  effort  is  made  to  clothe  the 
hard  facts  of  ec(jnomic  oppression  in  the  garb  of  sonie 
specious  e\])lanatioii.  Thus,  whether  it  be  actually  realized 
or  not,  it  is  possible  to  interpret  the  successive  stages  of  fiscal 
development  in  terms  of  an  attempt  to  enforce  various  criteria 
of  ability  to  pay. 

From  this  point  of  view,  namely  that  of  the  norm  or  test  of 
faculty,  it  may  be  said  that  no  less  than  five  answers  have 
been  given  in  the  course  of  history.  At  the  outset,  the  indi- 
vidual as  such  was  selected  as  the  norm.  Mere  numbers 
suffice  in  primitive  society  to  answer  the  requirements  of  jus- 
tice. Thus  it  is  that  everywhere  the  beginnings  of  direct 
taxation  take  the  form  of  the  poll  or  capitation  tax.  In  a 
primitive  community  where  private  property  has  but  slightly 
developed  or  where  the  differentiation  in  '^conomic  conditions 
is  insignificant,  where  there  are  no  very  rich  and  no  very  poor, 
where  every  man  works  and  where  individual  revenue  is  de- 
rived almost  exclusively  from  individual  exertion,  it  is  indeed 
true  that  polls  form  an  approximately  satisfactory  test  of 
ability  in  taxation.  Wherever  we  have  primitive  economic 
and  democratic  conditions,  whether  it  be  in  the  early  stages 
of  Teutonic  civilization  or  in  the  beginnings  of  Puritan  New 
England,  we  find  that  the  poll  tax  forms  an  essential  ingredient 
of  the  fiscal  system. 

With  the  development  of  private  property,  however,  and 
with  the  differentiation  of  economic  classes,  a  change  sets  in. 
The  original  equality  of  wealth  is  followed  by  nn  inequality 


r 


I 


5  The  Income   Tax 

of  possessions.  The  distribution  of  ownership,  in  otlier  words 
is  now  gradually  divorced  from  the  mere  accumulation  of 
numbers.  A  poll  tax  responds  less  and  less  well  to  the  de- 
mands of  faculty  until  it  finally  becomes,  at  all  events  as  the 
sole  test  of  ability,  almost  wholly  a  mockery.  I'.lforts  may 
indeed  be  made  to  improve  the  situation  for  a  time  by  grad- 
uating the  poll  tax  according  to  outward  signs  so  that  the 
poll  tax  in  some  cases  becomes  a  class  tax.  the  assessment 
being  graded  roughly  in  accordance  with  the  social  position 
of  the  individual.  Hut  this  class  or  classified  poll  tax,  as  we 
find  it  in  the  early  Middle  Ages,  is  only  a  makeshift,  and  be- 
fpre  long  the  poll  tax  is  either  supplemented  or  supplanted  by 
a  property  tax. 

§  2.    Property  as  the   Test  of  I'aciilty 

In  this  second  stage  of  development,  property  is  accepted 
as  the  test  of  faculty  in  taxation.    For  many  centuries  it  forms 
an  admirable  test.     Amid  the  rude  conditions  of  ownership 
that  we  find  at  this  stage  of  economic  life,  private  property 
consists  very  largely  of  land  and  of  appurtenances  to  land,  so 
that  the  property  tax  is  virtually  a  tax  on  real  estate.     Grad- 
ually, as  prira.uve  industry  and  commerce  develop,  various 
forms  of  personal  property  come  into  prominence   and  are 
added  to  the  tax  lists,  until  finally  the  two  elements  are  fused 
together  in  order  to  form  the  general  property  tax,  which  is 
universally  found  in  this   stage   of   economic   development. 
Property  becomes  the  only  jiossible  general  test  of  faculty  in 
taxation  because  it  is  the  specific  mark  of  distinction  between 
classes  and  between  individuals  within  each  class.     At  first 
the  property  tax  is  shyly  and  cautiously  added  to  the  poll  tax, 
as  an  unimportant  feature  of  the  system ;  then  the  property 
tax  grows  in  significance  while  the  poll  tax  slowly  recedes ; 
until  finally  the  poll  tax  disappears  and  the  property  tax  re- 
mains in  possession  of  the  field.     The  general  property  tax  is 
found  wherever  a  primitive  democracy  is  accompanied  by  a 
moderate  agricultural  and  commercial  development. 


:  ^i.<^^im^^k^.I^S^e^^^^Mi^Jl^i 


Tlu  Fundamental  Problems 


For  a  lonR  time  the  general  property  tax  functions  satisfac- 
torily and  responds  fairly  well  to  the  canons  of  justice  in  tax- 
ation. Hut  in  the  inevitable  course  of  economic  development, 
with  the  >?rowing  differentiation  of  economic  classes  and  with 
the  increasin;,'  complexity  of  economic  life,  certain  difficulties 
make  themselves  felt,  not  only  in  the  practic:il  application  of 
the  system  hut  also  in  the  theoretical  basis  of  the  tax.  With 
the  practical  difficulties  of  the  system,  this  is  not  the  place  to 
deal.  The  causes  of  the  breakdown  of  the  j;eneral  [jroperty 
tax  and  the  reasons  why  it  everywhere  disappeared  in  the  later 
Middle  A;,'es  in  Europe  and  why  it  is  beginninj^  to  disappear 
in  its  last  .stron-hoid  —  the  United  States  —  have  been  suffi- 
ciently expounded  elsewhere.'  What  interests  us  in  this  place 
is  the  theoretical  sh()rtcominJ,^s  of  property  as  a  test  of  fac- 
ulty in  taxation. 

These  shortconiinj^s  may  be  siimmarized  as  follows  :  In  the 
first  j)laco,  a  f^ap  often  discloses  itself  between  property  and 
product.  It  is  indeed  true  that  in  the  lon<;  run  the  value  of 
a  piece  of  property  st.inds  in  a  close  relation  to  its  yield.  To 
use  a  modern  phrase  that  has  become  familiar,  capital  is 
nothins;  but  capitalized  income.  That  is  to  say,  what  a  piece 
of  property  will  fetch  in  the  market  represents  nothing  but 
a  capitalization  of  its  present  and  prospective  yield.  While 
this  is,  however,  true  in  the  long  run,  it  is  not  true  in  the 
short  run.  The  value  of  a  piece  of  property  may  bear  only 
a  slight  relation,  or  no  relation  at  all,  to  the  yield  of  that 
property  in  any  particular  year,  or  even  for  a  term  of  yeans. 
Two  farmers  may  possess  homesteads  of  equal  value.  The 
one  may  have  bad  luck  and  suffer  drought  or  inundation, 
while  the  other  may  enjoy  a  bountiful  harvest.  With  prop- 
erty as  a  test  of  faculty,  the  two  farmers  will  pay  the  same, 
although  the  produce  of  their  farms  may  differ  enormously. 
Again,  of  two  house  owners  desiring  to  rent  their  property, 
one  may  succeed  and  the  other  may  fail  for  the  year,  or  for  a 
term  of  years.  Although  the  unsuccessful  owner  has  no  in- 
come, he  must,  with  property  as  the  test  of  faculty,  pay  the 

ri,  ii::.:y:  in   7'.iJia!i.:>i,  i.h.i|i.  ii. 


1  s...  ':..: 


,^!*5«rt? 


t 


8 


The  Income  Tax 


same  amount  a»  the  other.     Instances  mi^ht  he  mn'.tiplic.l. 
all   tending   to  show  that    property   ami    product    may    tre- 

qucntly  diverRe.  ,     „       ,  ,1^ 

In  the  second  place,  a  distinction  is  gradually  observable 
between  property  incomes  and  labor  incomes.     In  the  early 
stages  of  the  development,  where  property  owners  bear  the 
greater  part  of  the  public  burdens,  the  man  who  has  no  proi)- 
crtv  either  is  reached  by  the  poll  ta.x.  or  is  ot    such  sl.K'ht 
taxable  capacity  that  he  is  entirely  omitted.     In  m.ulern  tunes 
however,  with  the  K^owth  of  lucrative  proiessions  and  with 
the  great  opportunities  for  rich  salaried  positions,  lam.r  m- 
comes  assume  an  importance  which  did  not  exist  ui  earlier 
times      It  may  well  be  granted  that  the  recipient  ot  a  modest 
salary  should  be  put  on  a  ditferent  i-lane  from  the  individual 
who  receives  a  like  income  from  invested  pr..perty ;  but  that 
is  a  different  thing  from  claiming  that  lawyers  or  doctors  or 
engineers  or  railwav  presidents  with  salaries  or  professional 
earnings  of  from  twenty-tive  to  one  hundred  thousand  dollars 
a  year  should  not  be  called  upon  to  contribute  at  all  to  the 
public  ch.-rges.     The  acceptance  of  property  as  the  sole  test 
of  ability  u.  i-ay  would   result  in  a  complete  exemption  of 
such  classes,  and  would  give  rise  to  countless  well-founded 

complaints. 

In  the  third  pl.u  c.  the  recognition  of  property  as  the  test 
of  abilitv  to  pav  ndses  a  difficulty  connected  w'th  indebted- 
ness f  h  re  is  a  well-defined  distinction  between  the  legal 
and  the  economic  conceptions  of  property.  By  property  in 
the  legal  sense  is  meant  the  ownership  of  individuals  in  things 
or  hi  rights  to  things,  irrespective  of  the  ulterior  division  of 
the  produce  of  the  property.  Hy  property  in  the  economic 
sense  -  usually  denominated  wealth  -  is  meant  the  control  of 
the  services  of  the  thing  possessed.  If  a  part  of  the  services 
or  produce  has  to  be  handed  over  by  the  individual  some 
one  else,  it  does  not  really  form  a  part  ol  his  wealth.  The 
owner  of  a  ten-thousand-dollar  farm  who  has  mortgaged  it 
for  five  thousand  dollars  possesses  wealth,  or  property  in  the 
economic  sense,  to  the  exlenl  ul  five  thousand  dollars.      That 


.  teS&S'^'i^^^  .::^?.lfS^SaB^ISaanHKflS&^:ii^«ll^i&:Titr.^^ 


The  J'undamenlat  I'robUm^  9 

wealth  represents  the  amount  that  he  is  worth.  His  debts  are 
a  part  not  of  his  assets,  hut  of  his  iiahilitii-s,  anil  must  be  de- 
dutted  from  th-j  ;;.ssets  in  order  to  strike  a  lorrcit  halan<-c 
sheet.  I.c;(ally,  however,  —  .it  all  events  uiuU-r  the  nuKlcrn 
law  of  mortt;af;e— his  property  amounts  to  ten  thousand  dol- 
lars. If  the  ^;overnmiiit,  as  is  usually  the  laM-,  looks  at  the 
piece  of  (jroperty  rather  than  at  the  inrjividual  condition  of 
the  property  owner,  it  will  assess  the  taxpayer  on  the  full  ten 
thousand  dollars.  In  other  words,  in  a  property  tax  the 
expenses  incurred  in  ni  lint.iinin;;  the  property  are  ordinarily 
not  considered. 

Thi.s  insistctice  upon  the  le;,'al  rather  than  the  economic 
conception  (if  proju-rty  dates  from  the  period  when  virtually 
all  existing  credit  consisted  of  consumption  credit  rather 
than  production  credit  and  '  n  indebtedness  played  a 
very  small  role  in  the  social  .momy.  In  modern  times, 
however,  credit  has  become  the  very  has:  of  business  enter- 
prise. Under  these  circumstances  the  problem  of  indebted- 
ness assumes  a  new  significance.  It  was  but  natural,  therefore, 
that  the  property  tax,  where  it  :  rill  existed,  should  take  some 
account  of  this  new  condition  and  should  endeavor  to  make 
allowance  for  debts.  But  experience  soon  showed  that  this 
attempt  was  frauf,'ht  with  great  practical  diiriculties.  As  we 
have  seen  in  the  United  States,  the  creation  of  fictitious  debts 
became  such  a  paying  investment  that  most  of  the  states 
which  introduced  the  system  were  comi)eIled  again  to  abolish 
it.  As  a  consequence,  some  states  today  deduct  mortgage 
debts  from  real  estate ;  others  deduct  general  indebtedness 
from  personal  estate;  a  few  permit  deduction  for  indebted- 
ness in  genera! ;  while  most  of  the  states  allow  either  lor  no 
deduction  at  all,  or  for  deduction  in  only  personal  or  real 
estate,     .'■'.ich  a  situation  is  bound  to  be  unsatistactorv. 

In  the  fourth  place,  proj)crty  as  a  test  of  faculty  fails  to  draw 
the  correct  distinction  between  the  constituent  elements  of 
wealth.  In  former  tnmes,  when  property  was  scanty  and  almost 
entirely  used  for  productive  purposes,  the  situation  was  simple. 
But  in   modern  times  a  sharj)  line  must  be  drawn  between 


-:K^^^T^v'i^i^.^mm^im&Km\ 


miyBiTXjaa     ^ 


^WBMi'^.,-:&*»^:i"'*: 


I: 


t*  ii 

ii 


IQ  TIte  Income   Tax 

consumption  property  and  productive  capital,  between  prop- 
erty utilized  primarily  for  purposes  of  enjoyment  and  property 
utilized  for  the  securing  of  a  money  income.  Take  as  an 
example  of  the  first  case  a  private  library  or  art  gallery  or 
park  which,  instead  of  being  the  source  of  a  money  income, 
is  really  the  occasion  of  a  distinct  expenditure.  To  put 
such  things  on  the  same  footing  as  property  which  yields  a 
money  income  is,  to  say  the  least,  a  procedure  open  to  grave 
doubt.  To  tax  property  as  a  unit,  irrespective  of  the  kind  of 
property  or  the  income  from  the  property  or  the  outlay  con- 
nected with  the  property,  becomes  in  modern  times  a  source 
of  increasing  embarrassment. 

Finally,  in  the  fifih  place,  the  history  of  the  general  prop- 
erty tax  has  everywhere  shown  that  there  seem  to  b'^  insuper- 
able difficulties  in  reaching  the  multifold  forms  of  wealth  in 
a  developed  industrial  society.    It  is  everywhere  conceded  that 
universality  of  taxation  is  one  of  the  leading  fiscal  principles; 
yet  the  growing  difficulties  of  reaching  all  the  different  forms 
of  property  inevitably  lead  to  the  escape  of  some  and  to  the 
over-assessment  of  others.     The  theory  of  the  general  prop- 
erty tax  originally  rested  on  the  assu.nption  that  fiscal  equality 
could  be  reached  by  taxing  all  individuals  on  their  v.sible 
property.     W'len  the   mass   of   property  split  up.   and   the 
myriad  forms  of  modern  intanj,ible  personalty  disclosed  them- 
selves, the  basis  of  the  theory  was  undermined  by  the  new 
conditions,  and  instead  of  equal  and  universal  taxation  there 
was  now  developed  a  system  of  partial  and  unequal  taxation. 
If  we  keep  in  mind  these  five  different  kinds  of  complica- 
tion, we  shall  be  able  to  comprehend  how  it  was  that  slowly 
but  surely  property  came  to  be  regarded  as  a  less  and  less 
satisfactory  form  ot  taxation,  and  we  shall  not  be  surprised 
to  learn  that  it  was  gradually  replaced  by  other  tests  of  ability 
to  pay. 

§  3.    lixpauUtHre  and  Product  as   Tests  of  Faculty 
The  next  step  in   che  development   was  the  selection  of 
expenditure  as  the  criterion   of   faculty,     l-xpcnditurc  was 


IVic  Fuj.damental  Problems 


II 


first  advanced  as  the  best  test  of  ability  to  pay  toward  the 
close  of  the  Middle  Ages.  The  great  tax  reformers  of  the 
sixteench  and  seventeenth  centuries,  like  Bodin,  Hobbes  and 
Petty,  were  influenced  chiefly  by  the  last  argument.  The 
general  property  tax  had  everywhere  become  a  mere  travesty 
of  justice,  and  the  system  was  honeycombed  by  abuses  which 
seemed  to  be  entirely  ineradicable.  To  attain  a  system  of 
taxation  which  no  one  could  escape  became  the  watchword 
of  the  tax  reformers.  Since  every  man,  rich  or  poor,  neces- 
sarily incurs  expenditures,  a  system  of  ta.xes  on  expenditure 
was  now  advocated.  This  took  the  form  of  both  direct  and 
indirect  taxes  on  consumption,  as  well  as  of  taxes  on  trade 
and  business  which  were  supposed  ultimately  to  reach  the 
consumer.  Indirect  taxes  on  trade  and  commerce  had  indeed 
arisen,  at  a  comparatively  early  period,  as  a  development  out 
of  the  media'val  system  of  fees  and  tolls.  But  now,  in  the 
sixteenth,  seventeenth  and  eighteenth  centuries,  every  Euro- 
pean country  witnessed  the  growth  of  a  system  of  excises 
or  expenditure  taxes,  which  grew  in  importance  as  the  old 
general  property' tax  dwindled.  The  general  excise  or  the 
single  excise  b.->-ame  the  ideal  of  the  publicists,  and  was  in 
a  fair  way  of  being  realized  in  practice. 

While,  however,  consumption  taxes  succeeded  in  avoiding 
some  v.f  the  worst  abuses  of  the  general  property  tax,  it  was 
not  Ion;;  before  this  system  in  turn  disclosed  difficulties  in  its 
operation.  If  the  rich  man  stood  from  under  in  the  general 
property  tax,  it  was  largely  because  the  rich  man's  property 
could  not  be  reached.  With  the  development  of  expenditure 
as  the  test  of  faculty,  however,  it  was  inevitable  that  the  rich 
man  should  again  escape  his  share,  because  of  the  disparity 
between  expenditure  and  revenue  in  the  different  social 
classes.  The  lower  we  go  in  the  economic  scale,  the  greater 
is  the  lack  of  equilibrium  between  revenue  and  expenditure. 
At  the  bottom  of  the  scale  are  those  whose  incomes  only 
barely  suffice  for  their  living,  while  at  the  top  of  the  scale  are 
those  whose  expenditures,  no  matter  how  large,  are  but 
a  fraction  of  tneir  revenue.     In  the  one  case  there  is  abso- 


..:^"^s!Ei«rw?«T:*?5Q-j?CBfs; 


i      i 


|i 


'! 


J  2  Tke  Income  Tax 

lutely  no  surplus  available;    in  the  other  the  surplus  is  many 
ILI  greater  than  the  expenditure.     Necessanly.  under  such 
aTvstem  a  tax  on  expenditure  becomes  an  increasingly  heavy 
burC  o,:  the  least^ealthy  classes.     It  is  for  th.s  reason 
that  we  can  explain  the  comparatively  slight  resistance  to  the 
adoption  of  the  excise  system  throughout  Europe  at  a  time 
whin  political  life  was  still  controlled  ^y^^e  -st^^^J 
land  or  of  moneyed  capital.     But  it  is  evident   hat  w  th  the 
growth  of  democracy  in  more  recent  times  a  system  of  taxa- 
fion  which  inevitably  results  in  undue  burdens  on  the  less 
fortunate  members  of  society  was  destined  to  become  unpop- 
ular and  to  pass  away.     Kxpenditu      becomes  an  unsatisfac- 
tory test  of  ability  to  pay,  not  only  because  it  puts  a  premium 
on  the  penurious  rich  man.  but  because  it  ^^^V-^^^l  ""^^ing 
burden  upon  the  average  poor  man.     One  of  the  first  effort 
of  the  French  Revolution  was  to  abolish  not  only  the  remains 
of  the  taille,  or  general  property  tax,  but  also  the  whole  exist- 
ing system  of  taxes  on  consumption;  and  the  history  of    he 
nineteenth  centurv  in  every  progressive  country  has  been  the 
history  of  the  attempt   to  reduce  the  burden  of   the  excise 
taxes  so  far  as  they  are  still  liable  to  the  objections  mentioned 
above.     As  a  consequence,  expenditure  has   been  virtually 
abandoned  as  the  sole  test  of  faculty. 

The  next  stage  in  the  development  is  represented  by  the 
adoption  of   product  or   produce  as  the  norm  of  taxation 
We  have  learned  of  the  shortcoming,  of  property  as  the  test 
of  justice,  and  we  have  seen  that  the  adoption  of  expenditure 
in  lieu  of  property  was  supposed  to  meet  the  objections  of 
lack  of  universality.     With  the  failure  of  this  system,  how- 
ever tax  reformers  and  progressive  governments  reverted  to 
some  of  the  other  defects  of  the  property  tax,  such  as  the  dis- 
crepancy between  the  value  and  the  yield  of  the  property, 
and  the  inequality  of  the  tax  due  to  the  escape  of  the  prop- 
erty owner.     It  was  reasoned -and  with  considerable  force 
-that  if  recourse  were  taken  to  the  i)roduce  of  the  property 
rather  than  to  the  property  itself,  several  results  would  be 
achieved.     In   the  first  place,  a  man   would  be  taxed  only 


ii 


«B2i'S?«£ 


The  Fundamental  Probi.ms 


13 


upon  what  he  actually  received,  and  the  hardships  of  pay- 
ment without  revenue  would  at  once  be  avoided ;  while  sec- 
ondly, and  still  more  important,  the  tax,  instead  of  being 
assessed  on  the  whole  of  the  property,  and  thus  being  sub- 
ject to  the  abuses  cither  of  inquisitorial  assessment  or  of 
illegitimate  evasion,  would  be  levied  directly  on  the  produce 
of  the  thing  itself,  which  yielded  a  return.  Property  would 
be  split  up  into  its  constituent  elements,  and  the  tax  would 
be  levied  on  the  yield  of  each.  Thus  the  tax  would  be  levied 
on  the  produce  of  a  piece  of  land,  irrespective  of  who 
owned  the  land ;  the  yield  of  the  land  was  to  be  ascertained 
by  a  careful  p  occss,  and  if  the  taxes  were  not  paid  by  some 
one,  the  lari-  would  be  sold.  In  the  same  way  as  the  rental 
of  a  dwelling  was  easily  ascertainable,  the  house  tax  was  now 
imposed  upon  the  dwcUuigs  when  they  were  actually  rented, 
and  only  then,  and  if  the  tax  were  not  paid  by  some  one, 
the  house  was  sold.  So  a  business  was  conceived  of  as  an 
entity,  the  product  of  which  was  to  be  measured  by  outward 
signs,  such  as  the  location  of  the  business,  the  number  of  the 
clerks,  etc.,  and  the  tax  was  imposed  upon  the  business  itself. 
A  similar  method  was  pursued  with  the  other  forms  of  property. 
Thus  there  developed  during  the  seventeenth,  the  eighteenth 
and  the  first  half  of  the  nineteenth  century,  a  system  of  taxes 
on  things  rather  than  on  persons,  or  a  system  of  taxes  on  the 
product  of  the  property  rather  than  on  the  person  of  the 
property  owner.  This  is  the  system  which  became  known 
in  France  under  the  name  of  real  taxes  {taxes  ri'cllcs)  as 
opposed  to  the  old  pcrsonnl  taxes  {taxes  fersoiinelles),  and 
which  was  termed  in  Germany  l^rtrogsstenern  as  opposed 
to  the  old  VermogcnsstCHcrn.  In  France  it  was  the  work  of 
the  Revolution  which  created  a  system  of  real  taxes ;  in  Ger- 
many and  the  other  continental  countries  the  movement  had 
begun  earlier  and  was  completed  somewhat  later.  In  Eng- 
land, also,  the  same  system  developed,  being  composed,  at  the 
end  of  the  eighteenth  century,  of  the  land  tax  —  the  last 
survivor  of  the  mediaval  general  property  tax,  —  the  house 
tax,  and  the  assessed  tr.xcs. 


H 


Tlu  Income   Tax 


The  adoption  of  product  or  produce  as  a  test  of  faculty 
indeed  marked  a  decided  step  forward.     But  as  time  went 
on  and  especially  after  the  industrial  revolution,  the  short- 
comings in  the  theory  disclosed  themselves.     The  very  excel- 
lence of  the  idea  of  regarding  only  the  thing  rather  than  the 
person  now  itself  gradually  became  a  weakness.     For,  after 
all,  taxes  arc  paid  by  human  beings  and  not  by  inanimate 
thi'.igs.     A  piece  of  property  may  be  assessed  to  taxation, 
but  "the  tax  must  be  paid  out  of  the  pockctbook  or  bank 
account  — that    is   out   of    the   revenue  —  of   some   person. 
Since,  under  the  system  of  private  ownership,  every  piece 
of  propcrtv  belongs  ultimately  to  an  individual,  to  tax  the 
yield  of  a  piece  of  property  really  means  finally  to  tax  the 
revenue  of  an  individual.     As  soon,  however,  as  we  regard 
the  relative  condition  of  individuals,  it  becomes  apparent  that 
a  system  of  taxes  on  product  is  painfully  defective.     Two 
adjoining  pieces  of  property,  for  instance,  may  enjoy  pre- 
cisely the  same  yield  ;  yet  in  the  one  case  the  yield  may  be 
due  exclusively  to  the  bounty  of  nature,  and  in  the  other 
case  it  may  be  the  result,  in  large  part,  of  the  supplementary 
efforts  of  the  owner.     Allowance  may  indeed  be  made  'or 
this  state  of  affairs  by  distinguishing  the  net  from  the  gross 
produce,  and  by  levying  the  tax  on  the  former.     Primitive 
land  taxes,  for  instance,  like  the  tithes  of  old,  were  taxes  on 
gross  produce  ;  whereas  the  more  approved  modern  form  of 
product  taxation  is  a  tax  on  net  produce ;  that  is,  making 
allowance  for  the  expenses  nf  cultivation.     But  this,  although 
an  undeniable  step  in  advance,  is  not  sufficient ;  for  a  system 
even  of  net  produce  taxes  does  not  take  account  of  ine  in- 
debtedness of  the  individual.     The  net  produce  of  two  farm- 
ers, after  allowing  for  the  expenses  of  cultivation,  may  be 
precisely  the  same ;  but  if  the  owner  of  one  farm  has  pur- 
chased it  on  a  mortgage,  his  final  net  earnings  will  be  less 
than  that  of  his  neighbor.     The  net  produce  of  a  piece  of 
property,    in  other  words,  is  no  necessary  indicatioi.  of  the 
net  revenue  of  the  owner.     The  tax  upon  the  thing,  just  be- 
cause it  is  upon  the  thing,  does  not  lend  itself  readily  to  the 


li  ■.        -  I* 


The  FundantcHtal  Problems  15 

shifting  conditions  of  the  man  who  owns  the  thing ;  and  yet 
the  real  ability  of  a  person  to  pay  taxes  must  be  in'  some  re- 
lation to  his  individiKil  condition.    Moreover,  the  immense  in- 
crease in  modern  wealth  and  the  appearance  of  prodigious 
fortunes  have  contributed  to  bring  into  prominence  the^idea 
of  graduated  taxation.     Manifestly,  h   u-evcr,  a  system  of  real 
taxes  or  taxes  on  product  does  not  lend  itself  to  the  progres- 
sive principle.     The  larger  piece  of  land  mav  be  owned  by 
the  poorer  man,  and  the  great  wealth  of  the' rich  man  may 
consist  of   a  number  of  relatively  small    separate  pieces  of 
property.     A  system  of   taxation   which  in  its  very   nature 
does  not  admit  of  progression    evidently  could  not   perma- 
nently respond  to  the  necessities  of  the  situation.     With  the 
revolution  in  the  conception  of  faculty,  the  tax  on  product  or 
on  things  thus  came  to  be  continually  more  unsatisfactory. 
Just  as  the  gross  produce  system  gave  way  to  the  net  produce 
system,  so  now  the  net  produce  system  in  its  turn  was  bound 
to  disappear. 

§  4.    Income  as  the  Test  of  Faculty 
It  was  thus  that  the  fifth  and  final  stage  was  reached,  and 
that  income  was  selected  as  the  test  of  faculty  in  taxation. 
And  there  is  no  doubt  that,  taking  it  b/  and  large,  this  re- 
sponds more  accurately  to  modern  demands  than  any  of  the 
preceding  tests.     Accordingly,  for  a  time,  it  seem^.j  as  if  the 
new  test  would  supplant  all  the  other  criteria,  and  as  if  all 
direct  taxes  at  least  would  be  abolished,  to  be  replaced  by  a 
single  income  tax.     Here  again,  however,  more  careful  study 
disclosed  certain  weaknesses  and  disadvantages  in  income  as 
the  sole  test  of  ability  to  pay.     What  are  these  weaknesses .' 
In  the-  first  i)lace  there  is  the  difficulty  of  deciding  with 
accuracy  what  income  really  means.     Do  we  mean  by  income 
gross  or  net  income  ;  and,  if  the  latter,  do  we  include  in  the 
term  everything  that  comes  in  within  a   definite  period,  or 
should   gifts,  inheritances,  and    speculative  revenues   be 'ex- 
cluded.?    Furthermore,  do  we  me;m  by  income  only  money 
income,  or   also   the  equivalent  of  money  income  >     These 


i6 


The  Income  Tax 


!f  'P 


\   i 


points  will  be  discussed  below.  Even  assuming,  however, 
that  a  satisfactory  conclusion  has  been  reached  on  this  matter, 
the  next  difficulty  arises  from  the  fact  that  all  incomes  do  not 
afford  equally  good  criteria  of  a  man's  ability  to  pay.  Is  an 
income  of  one  thousand  dollars  derived  from  hard  personal 
work  to  be  put  exactly  on  a  par  with  an  income  of  one 
thousand  dollars  derived  from  an  inheritance,  or  fr^m  a 
lucky  turn  in  the  market  ?  The  further  ruestion  arises  as  to 
whether  different  amounts  of  income  present  identically  the 
same  criteria  of  ability  to  pay.  Is  the  one  thousand  dollars 
which  forms  the  entire  income  of  a  day  laborer  to  be  treated 
in  the  same  way  as  the  fifty-thousand-doUar  income  of  a  mil- 
lionnaire  ?  Manifestly,  the  identical  rate  on  all  kinds  and 
amounts  of  income  does  not  constitute  an  ideal  criterion 
of  tax-paying  ability.  But  still  further,  even  if  we  assume 
that  these  difficulties  are  in  some  way  disposed  of,  let  us 
compare  the  two  following  cases :  A  is  a  bachelor,  in  good 
health,  with  no  dependent  relatives,  residing  in  a  small  town 
where  the  scale  of  life  is  simple,  and  so  little  interested 
in  charity  or  public  affairs  that  he  lays  by  a  considerable 
amount  every  year.  B  is  the  recipient  of  precisely  the  same 
amount  of  income,  but  is  a  married  man,  with  a  large  family  ; 
he  lives  in  a  great  city  with  its  multitudinous  social  demands ; 
he  is  in  poor  health  and  must  spend  considerable  sums  on 
physicianr.  and  medicines ;  he  has  relatives  dependent  upon 
him  ;  and  he  is  such  a  model  citizen  that  he  gives  largely  to 
charities  and  to  public  purposes.  Can  it  be  said  that  these 
two  men.  with  precisely  the  .same  income,  have  precisely  the 
same  ability  to  pay .''  Finally,  let  us  take  the  case  of  two 
men,  one  of  whom  has  invested  a  large  sum  in  business  or 
in  securities  which  yield  a  definite  annual  revenue,  while 
the  other  has  invested  the  same  amount  for  si)eculative  pur- 
poses in  a  piece  of  real  estate  which  remains  unimproved  and 
therefore  unrented,  or  in  a  railway  stock  which  happens  that 
year  to  pay  no  dividends.  Can  it  be  said  that  the  latter  has 
no  ability  co  ])ay  at  all,  as  compared  with  the  former,  because 
he  receives  no  income  ? 


,::i*v..- 


^^ms^^-ikssm^'^ 


•*,*a 


&^-^l^^^: 


The  Ftindamental  Problems  17 

These  are  but  a  few  of  the  perplexing  problems  th.t  con- 
front us  as  soon  as  we  make  the  claim  that  income  is  a 
perfectly  satisfactory  or  ideal  test  of  faculty.  As  a  matter 
of  fact,  while  mcomc  is  in  many  respects  a  better  test  than 
any  of  the  preceding  criteria  that  have  been  mentioned,  it  is 
not  a  thoroughly  adequate  test,  for  the  simple  reason  that  no 
single  test  of  ability  can  be  found  which  will  adju.  t  itself  to 
the  varying  needs  of  individuals. 

It  is  for   this    reason   that  the  early  enthusiasm  for  the 
smgle  income  tax,  even  in  theory,  graduallv  died  awav,  and  it 
was  realized,  to  an  ever  increasing  extent,' that  income  must 
be  supplemented   by  the  other  tests  of  faculty  in  order   to 
form  a  vvell-rounded  whole.     No  modern  tax  system,  accord- 
mg.y,  rehes  entirely  upon  an  income  ta.x,  even  as  the  sole 
direct  tax.     Each  of  the  preceding  tests,  while  unsatisfactory 
m  Itself,  nevertheless  possesses  some  advantages  which  can 
be  utilized  m  framing  a  system  of  taxation ;  property,  prod- 
uct, expenditure,  nay,  even  polls-each  in  turn  can  be  em- 
ployed as  a  partial  test  of  faculty  in  order  to  fill  out  certain 
gaps.     For  instance,  property  may  be  utilized  as  a  partial  test 
m  the  case  of  w.alth  held  for  enjoyment,  rather  than  for  gain  • 
m  the  case  of  property  invested  for  speculative  purposes;  in 
the  case  o!   property  where,  notwithstanding  the  temporary 
cessation  of  product,  the  mor  ^y  value  is  by  no  means  negli- 
gjble  ;  in  the  case  of  a  desire  to  tax  property  incomes  at  a 
higher  rate  than   labor  incomes;  and,  finally,  in  the  case  of 
great  fiscal  exigencies  where  it  is  necessary  to  take  a  part  of 
the  property  itself,  rather  than  simply  its  income.     A  tax  on 
product  may  be  essential  where  a  personal  tax  on  the  in- 
dividual would  be  impracticable.      A  tax  on  expenditure  is 
sometimes   desirable    either   where    the    income   cannot   be 
ascertamed  or  where,  because  of  the  temporary  character  of 
the  individual's  sojourn,  a  property  or  income  "tax  could  not 
well  be  enforced.     To  assert,  therefore,  as  is  often  done  by 
superficial  thinkers,  that  the  income  tax  is  the  fairest  of  all 
ta.xes.  is   to  maintain   an  untenable    position.     Purely   as   a 
matter  of  theory,  even,  an  income  tax  is  by  no  means'alwavs 


^- 


-Vita 


mmm:-. 


■^ 


js-^;i:: 


IS 


The  Income   Tax 


% 


It 

f, 


I 

I 


M 


I 


the  fairest  of  all  taxes.  The  most  that  can  be  said  with 
accuracy  is  that,  in  the  main,  so  far  as  direct  taxes  are  con- 
cerned, the  system  of  taxation  ought  to  be  so  framed  as  to 
correspond  roughly  with  the  income  <  the  various  classes  of 
taxpayers.  Hut  to  say  that  the  ideal  can  be  reached  by  any 
single  income  tax  is  preposterous.  While  the  system  of  tax- 
ation should  endeavor,  roughly  at  all  events,  to  adjust  itself 
to  income  in  general,  the  income  tax  as  such  can  form  only  a 
part,  even  though  it  may  be  a  permanent  part,  of  the  system, 
the  other  elements  of  which  must  bo  based  upon  the  remain- 
ing criteria  of  faculty  in  order  to  reach  as  close  an  approxi- 
mation to  justice  as  may  be  possible. 

Finally,  we  are  confronted  by  the  question  of  the  practical 
working  of  the  income  tax.  Even  if  the  income  tax  were  the 
fairest  of  all  taxes,  —  which,  as  we  have  seen,  is  not  necess^irily 
true,  — the  decision  as  to  whether  it  ought  to  be  utilized  \«ould 
depend  largely  upon  whether  this  fairness,  which  is  predi- 
cated of  it  in  the  abstract,  would  ensue  in  actual  practice.  It 
is  notorious,  however,  that  of  all  tax-rs  the  income  tax  is  per- 
haps the  most  difficult  to  assess  with  scrupulous  justice  and 
accuracy ;  so  that  what  is  conceived  in  justice  often  results  in 
crass  injustice.  If,  therefore,  we  add  these  great  practical 
defects  to  what  are  undeniable  theoretical  shortcomings,  we 
are  forced  to  the  conclusion  that  the  income  tax  is  by  no 
means  the  panacea  which  it  has  often  been  represented 
to  be. 

With  all  these  reservations,  however,  there  is  no  doubt  that 
in  the  struggle  for  social  and  fi.soal  justice  the  income  tax  is 
assuming  a  continually  more  prominent  part,  and  if  we  do 
not  pitch  our  expectations  too  high,  we  can  understand  why 
this  should  be  so.  Under  certain  conditions  the  efficiency  of 
the  income-tax  administration  may  gradually  be  improved, 
and  under  most  conditions  the  addition  to  the  tax  system  of 
the  right  kind  of  an  income  tax  constitute,  an  undoubted  step 
in  advance.  To  ascertain  what  these  conditions  are,  and  what 
constitutes  the  right  kind  of  an  income  tax,  is  therefore  a 
studv  eminently  necessary. 


m^ 


The  Fuudamental  Problems 


J9 

§  5-    The  Meaning  of  Ituonte 
At  the  outset  of  st.ch  a  study  it  is  desirable  to  secure  a 
clear  .dca  of  what  is  n,cant  by  income.     Income  is.  of  course 
to  be  d..st,ngu,.hcd  from  mere  receipts  or  gross  revenue      h 

:^  ^';;  •'"  ^^".^■^  r^'^  ^--^  -  ^'-  ->y  ^o2 

activity.     «y  income  ,s  always  meant  n.t  income,  as  opposed 
to  gross  income.     In  oth..-r  words,  from  the  recdpts  in  anv 
enterprise  we  must,  in  the  first  place,  deduct  t         x  e  ses  of 
the  enterprise -that  i.s,  the  outlay  incurred  in  sec  rg  the 
gross  product.     But.  secondly,  income  as  a  personal  catLory 
differs  from  net  product.  If  a  debt  has  been  contracted  in  order 
o  secure  the  produce  of  a  given  piece  of  property  or  of  a  g  v4 
en  erpnse  the  interest  on  the  debt  must  be  deducted.    Finrily 
n  the  outlays  or  expenses  which  have  been  incurred  to  sec  re 
the  product,  there  must  also  be  included  a  compensation  for 
wear  and  tear  of  plant ;  just  as  the  investor  in  sccuriti  s  com 
fCth      "'"^,'  -—by  deducting  an  amortization  quoU 
from  the  annual  proceeds.     Income,  therefore,  always  means 
net  income.  .  •»»vva_)s  means 

is  that'lhich'""  ^^'•'''  "  '^"""''^"^  ^^  ^^>""^  ^^^*  '^--o-^- 
IS  that  which  comes  in  to  an  individual  above  all  necessary 

expenses  of  acquisition,  and  which  is  available  for  hs  own 

consumption.     Since  the  income  is  a  flow  of  wealth,  itmus" 

speak  of  income  for  purpo.ses  of  taxation,  we  really  mean 

capital  denc.es  that  amount  of  wealth  which  flows  in  during 

purposes  of  consumption,  so  that  in  consuming  it.  hi.  capital 

com:":,r'r^^f^''^-  -^'^  ^^°''^"^'  ^-^^^•^^'  °^  ^^^-i  n 

come  uith   such  precision  as  completely  to  avoid   any  net 
impairment  of  capital  is  one  that  almost'baffles  the  student 

taxation.!     Again,  just  as,  on  the  one  hand,  income  does 

.Qo^au""  '?"'  ''"'^''"-  '"   ''"  ■''■'""'  "-^  """f""  '"'"'  ^"""'-.  >^ew  York 


out  in  practice.     See  p,,  400-403. 


ic  i.ical  in  theory,  woul.l  he  difficult  to  carry 


W^^^MMm^^^^Fw^S^^^^I^^. 


20 


The  Income   Tax 


i 
r 


ii" 


f  \ 


W  I 


not  comprise  those  elements  which  constitute  an  impairment 
of  capital,  so,  on  the  other  hand,  income  ought  not  to  be  con- 
ceived as  includin-;  those  merely  temporary  elements  which 
constitute  an  addition  to  capital.  In  a  certain  sense,  if  I 
receive  a  large  gift  or  an  une.\i)ected  inheritance,  these  are  a 
part  of  my  revenue  for  the  year;  but,  strictly  speaking,  as 
they  ate  not  expected  to  recur,  they  ought  to  be  regarded 
rather  as  additions  to  capital  than  constituent  elements  of 
income.  It  is  for  this  reason  that  some  writers  desire  to  add 
to  the  very  concepticm  of  income  the  idea  of  regularity,  tliat 
is.  the  inflow  of  wealth  from  a  more  or  less  regular  source. 
That  this  conception  is  not  free  from  difTiculty  is  undeniable; 
speculative  gains,  for  instance,  might  be  exceedingly  difTicult 
to  assign  with  precision.  The  difficulty,  however,  is  largely 
removed  by  the  fact  that,  for  purposes  of  taxation  at  least, 
where  income  is  confined  to  the  revenue  from  regular 
sources,  an  attempt  is  generally  made  to  reach  the  irregular 
additions  in  other  way.s. 

A  further  difficulty  arises  as  to  whether  income  is  to  in- 
clude only  money  income,  or  whether  it  also  comprises  the 
so-called  enjoyable  or  psychic  income,  that  is.  the  pleasurable 
sensation  or  usufruct  that  flows  in  to  the  individual  in  the 
shape   not   of    money,  but  of   money's   worth.     That   some 
psychic  income  ought   to  be  included,  goes  indeed  without 
saying.     Of  two  house  owners  the  one  may  occupy  his  own 
residence,  while  the  other  may  let  his  out  and  reside  with 
a  friend.     Shall  the  latter  be  taxed  on  the  house  rent  and 
the   former    be   exempt,    simply   because   one   receives   the 
benefit  in    the  shape  of   money,  and  the   other  in  money's 
worth  ?     Yet,  to  carry  out  the  principle  of  the  inclusion  of 
psychic  income  in  all  cases  would  be  to  enunciate  a  principle 
which  would  be  useless  for  fiscal  purposes.     Not  only  would 
there  be  no  way  of  comparing  the  psychic  income  of   one 
individual  with  that  of  his  neighbor,  but  there  is  no  known 
method  of  ascertaining  how  much  psychic  income  any  one 
secures.     It  may  therefore  be  said  that  income,  at  least  for 
purposes  of  taxation,  signifies  in  general  money  income,  with 


The  Futidamcnlal  Problems  91 

an  occasional  inclusion  of  such  psychic  income  as  is  notorious 
and  easily  calculable. 

Fiually,  the  question  arises  whether  the  conception  of  net 
income  which  we  have    reached  is  adequate  for  fiscal  pur- 
poses, and  whether  there  ou^'ht  not  to  be  substituted  for  it 
the  conception  of  clear  inc.me ;  that  is.  the  income  which 
remams  to  the  individual  for  his  own  enj.nment.  after  deduct- 
mg  the  charRes  which  rest  up„n  that  income  and  which  pre- 
vent h.m  from  disposing  of  the  income  for  his  own  regular 
and  md.vidual  purposes.     Manifestly,  such  a  conception  of 
clear  mcome  cannot  be  accepted  in  its  entirety ;  for  it  would 
practically  mean  that  a  man  should  be  permitted  to  deduct 
from  his  net  income  all  the  expenses  which  he  might  deem 
necessary,  the  result  being,  in  most  cases,  no  income  at  all 
for  revenue  purposes.     To  a  certain  extent,  however,  as  we 
shall  see,  allowance  is  actually  made  for  this  point  of  view  by 
all  modern  governments,  in  that  abatements  are  granted  for 
children  or  other  dependents,  and  so  far   as  further  allow- 
ances are  accorded  for  exceptional  expenditures.     The  con 
ception  of  income  which  is  to  be  utilized  for  fiscal  purposes 
therefore,  is  one  which  goes  a  little  beyond  that  of  net  income' 
|U.d  which  partially  approximates  to  the  character  of  clear 
mcome. 


The  conception  of  incomj  which  has  thus  been  reached 
IS  one  which   suffers,    however,  two   further   modifications 
before  the  mcome  of  the  individual  can  serve  even  as  a  half- 
way satisfactory  test  of  his  ability  to  pay.  a  distinction  must 
be  made  between  incomes  as  regards  both  their  nature  and 
their  amount.     The  two  chief  principles  of  justice  in  ta.vation 
are  generally  regarded  to  be  those  of  uniformitv  and  of  uni- 
versality.    Yet  the  endeavor  to  distinguish  incomes  in  regard 
to  their  nature  as  well  as  to  their  amount  seems  to  involve 
a  departure  from  these  two  principles.     The  distinction  be- 
tween incomes  with  reference  to  their  nature  is  commonly 
termed  the  differentiation  of  incomes;  the  distinction  between 
mcomes  with  reference  to  their  amount  is  commonly  called 


22 


Tfu  Income   Tax 


the  graduation  of  incomes.  In  what  respect,  then,  do  differ- 
entiation and  graduation  really  infringe  upon  the  principles 
of  uniformity  and  universality?  Let  us  consider  first  the 
question  of  differentiation. 


!  '. 


it 
\l 


I  I 


i    \ 


§6.    The  Diffircntiation  of  Taxation 

Uniformity  of  taxation  is  tantamount  ti)  equality  of  taxa- 
tion.    That  taxes  should  be  uniform  implies  that  there  should 
be  an  equality  in  the  burdens  of  individuals.     By  this,  how- 
ever, cannot  of  course  be  meant  absolute  numerical  equality. 
Such  equality  would  result  in  a  poll  tax,  and  we  have  seen 
why  a  poll  tax  becomes  unjust  after  property  itself  develops. 
Uniformity,  therefore,  means  rel.itive  uniformity,  or  relatively 
proportional  cciuality.     Hut  this  in  itself  does  not  solve  any 
problem.     For  the  question  at  once  arises,  "  relative  to  what  " 
or  "  proportional  to  what .' "     We  might  take  some  perfectly 
absurd  criterion,  like  red  hair,  let  us  say,  and  decree  that 
taxes  should  be  levied  only  on  red-haired  men,  ar.d  in  propor- 
tion to  the  redness  of  their  hair.     Manifestly,  this  is  not  the 
kind  of  relative  uniformity  that  is  implied  in  the  term.     T' e 
only  equality,  therefore,  which  can  possibly  be  intended  is 
that  which  has  reference  to  the  princijile  that  ought  to  govern 
the  fi.scal  relations  of  the  individual  to  the  government.    This 
principle,  as  we  have  seen,  is  that  of  faculty  or  ability  to  pay, 
and  we  are  thus  at  once  led  back  to  the  i)roblem  of  ascertain- 
ing the  correct  criterion  or  test  of  this  ability  to  pay.     We 
have  learned,  however,  that  income  as  such,  reg^i'ded  as  an 
absolute  quantity,  is  not  a  theoretically  correct  ^literion  of 
faculty,  and  that  it  is  necessary  at  all  events  to  make  a  dis- 
tinction between  different  kinds  of  income,  since  the  same 
amount  of  income  derived  from  different  sources  often  con- 
notes a  varying  degree  of  ability  to  pay.     We  are  the.efore 
logically  forced  to  the  conclusion  that  the  relative  equality, 
or   the   uniformity  which   is   demanded   by    justice,    is   not 
only  compatible  with,  but  in  reality  leads  to,  the  principle  of 
discrimination.     The  only  questinn  that  remains  is  to  asccr- 


Ths  Fundainenial  Problems  at 

tain  how  far  this  principle  of  discr.nination  is  to  be  carried 
and  where  we  reach  the  point  when  discrimination  involves 
a  real  breach  with  the  princii)ics  of  relative  uniformity. 

The  American  courts,  in  interpretinK  the  term  "uniformity" 
as  found  in  the  state  constitutional  provisions  affecting  taxa- 
tion, have  decided  that  unif<.rmity  does  not  require  exactly 
Identical  treatment  of  the  .lifferent  kinds  of  property  or  busi- 
ness subject  to  taxation.    A  reasonable  classification  is  almost 
universally  held  to  be  IcKltimate;  and  a  clas.sification  may  of 
course,  involve  a  discrimination  between  the  different  classes 
Now  all  that  is  meant  by  the  ,,rinciple  of  discrimination,  as 
applied  to  the  income  tax,  is  that  different  clas.scs  of  income 
may  be  treated  differently.     What  are  these  classes?     The 
distinction  that  has  become  most  familiar  in  recent  times  is 
that  between  earned  and  unearne.I  incomes.    This  distinction 
IS  based  on  the  principle  that  the  income  is  derived  in  the 
one  case  primarily  from  personal  exertion,  and  in  the  other 
case  without  personal  exertion.     All  manner  of  terms  have 
been  ai.plied  to  this  distinction.     Thus   temporary  incomes 
arc  contra.sted  with  permanent,  labor  with  property  incomes 
spontaneous  with  fixed  incomes,  pn-c-irious  with  realized  in- 
comes, and  even,  to  u.se  Gladstone's  celebrated  phrase,  "indus- 
trious   with  "  lazy  '•  incomes.     To  draw  a  sharp  line  between 
such  incomes  is  indeed  difficult,  because  in  incomes  nominally 
derived  from  property  there  may  be  all  decrees  of  coopera- 
tion on  the  part  of  the  owner.      the  strenuous  exertion  that 
may  be  needed  ^o  have  the  j.roperty  yield  any  income  at  all 
the  more  or  less  active  superintendence  of  th.:  proprietor  the 
excrc.se  of  only  a  little  care  in  the  choice  of  investment,  or 
absolutely  no  effort  at  all  on  the  part  of  the  owner.     In  the 
great  mass  of   business  incomes  where  large  capital  is  in- 
vested,   the   revenues    undoubtedly    partake   in    some   cases 
almost  equally  of  both  characteristics 

Notwithstanding  the  difficulty,  however,  of  drawing  anv 
hard  and  fast  line,  the  distinction  may  undoubtedly  be 
discerned  at  either  end.  Kspecially  in  modern  times,  with 
the  immense  growth  of  private  fortunes,  it  has  come  every- 


W^. 


24 


The  Income  Tax 


i\ 

K        V, 


where  almost  instinctively  to  be  recognized  that  an  income 
derived  solely  from  an  individual's  own  strenuous  personal 
exertions  ought  not  to  be  treated  in  the  same  way  as  the  in- 
come which  comes,  let  us  say,  from  government  bonds  or  from 
the  securities  of  a  corporation  in  the  management  of  which 
the  bondholder  or  stockholder  actually  takes  no  part  at  all. 

The  principle  of  discrimination  rests  ultimately  upon  ths 
doctrine  of  equality  of  sacrifice,  but  interpreted  in  a  scm^e- 
what  different  way  from  that  which  has  been  made  familiar 
by  John  Stuart  Mill.  The  sacrifice  of  which  he  spoke  is  the 
sacrifice  imposed  upon  the  individual  in  parting  with  the 
amount  of  the  tax,  as  compared  with  the  residue  of  income 
that  is  left  for  purposes  of  enjoyment.  On  the  other  hand, 
the  sacrifice  which  enieiges  when  we  are  dealing  will;  the 
problem  of  discrimination  is  the  sacrifice  involved,  not  with 
reference  to  the  expenditure  of  the  income,  but  with  ref- 
erence to  the  creation  of  the  income.  The  one  might  be 
called,  if  we  are  willing  to  coin  such  phrases,  a  consump- 
tional  sacrifice;  the  other,  a  productional  sacrifice.  The 
sacrifice  involved  in  earning  a  given  amount  of  income  is  a 
very  different  thing  from  the  sacrifice  involved  in  receiving 
an  equivalent  amount  of  unearned  income. 

How  far  the  principle  of  discrimination  chould  be  carried 
is,  of  course,  a  moot  question.  Most  countries  have  been 
content  with  its  application  in  a  very  moderate  way  to  labor 
and  to  property  incomes.  In  a  few  countries,  like  Italy, 
the  distinction  is  can  I'd  somewhat  farther,  .so  as  to  classify 
incomes  into  temporary,  permanent,  and  mixed  incomes. 
There  seems  to  be  no  reason  to  doubt  that  with  the  progress 
of  time  a  more  refined  method  of  discrimir  ition  will  be 
attained,  and  that  the  class. s  will  be  made  more  numerous. 

When  we  leave  the  question  of  the  kind  of  discrimination, 
and  approach  that  of  the  amount  of  discrimination,  we  of 
course  enter  upon  a  field  where  the  use  of  a  principle  may 
degenerate  into  its  al)use.  As  soon  as  we  depart  from  the 
doctrine  of  absolute  numerical  equality  and  adopt  thai 
relative  equality,  the  r'oor  is  naturally  opened  to  misappli< 


The  Fuudamental  Problems 


25 

tiona  of  the   relation.      It   might,  for   instance,  conceivably 
result  m  the  complete  exemntion  of  all  labor  incomes,  and 
place  such  a  high  rate  up-  Mi..onu-s  derived  from  property 
of  a  certain  class,  as  virf  ally  to  <:on;).ca  e  that  ki-  d  of  prop- 
erty.    This  is,  however,   •  u   'vsyy  aKaii-.^t  which  we  can  hope 
to  guard  by  a  reasonable  vm^Wc  sentiment  ana  by  the  com- 
mon sense  of  the  community  01,  i:;  countries  wh.-re  written 
constitutions  exist,  by  an  appeal  to  the  underlying  idea  of  a 
rational  equality.     If  absolute  uniformity  is,  as  we  have  seen 
really  a  derogation  from  justice,  it  is  no  objection  to  the  in- 
troduction of  a  relative  unitormity  that  the  relativity  may  be 
:  bused.     Thus  far  no  attempt  has  ever  been  made  to  abuse 
this  relativity  so  far  as  discrimination  in  the  nature  of  the 
income  is  concerned.     If  tiie  problem  ever  arises,  it  will  be 
time  to  deal  with  it  on  the  general  grounds  of  fiscal  justice 
and  actual  taxable  capacitv 


§  7.    Exemption  from    Taxation 

The  other  phase  of  deviation  from  an  exactly  identical 
treatment  of  incomes  has  reference  not  to  the  nature  but  to 
the  amount  of  the  income.  This  problem  assumes  two  form.., 
either  that  of  the  complete  exemption  of  all  incomes  up  to 
a  certain  point,  with  the  same  treatment  of  all  above  that 
point;  or,  on  the  other  hand,  tl.it  of  a  varying  treatment 
of  incomes  according  to  their  magnitude,  irresi)ective  of  the 
amount  of  exemption.  Naturally,  also,  there  may  be  various 
combinations  of  these  two  plins.  Fundamentally,  however, 
the  problems  involved  are  first,  that  of  exemption,  and  sec- 
ond, that  of  graduation. 

The  question  of  exemption  from  taxation  is  indeed  not 
confined  to  the  income  tax,  nor  is  it  a  modern  problem.  At 
all  times  and  in  all  ages  we  have  had  examples  of  departure 
from  'he  principle  of  universality  of  taxation.  In  the  later 
Roman  Empire,  for  instance,  where  the  burden  of  local 
charges  — the  so-called  miinera ~\\m\  become  crushing,  all 
kinds  of  more  or  less  illegitimate  privileges  were  granted  to 


26 


The  Incojne   Tax 


i    '■)! 


1 1 


t  f- 


individuals,  until  exemption  from  taxation  — immnntfas,  or 
freedom  from  the  particular  m/oiits  —  became  the  common 
term  for  exemption  in  general,  and  has  been  preserved  in 
our  modern  word  "immunity."  In  the  Middle  Ages  it  is 
well  known  that  the  privileged  classes,  like  the  nobles,  the 
clergy  and  the  lawyers,  secured  such  immunities  for  them- 
selves, and  that  especially  in  France  exemptions  could  vir- 
tually be  purchased  by  any  one  who  was  powerful  enough  to 
do  so.  It  is  no  wonder  that  exemption  from  taxation  should 
have  come  into  such  disrepute.  As  we  have  seen  above,  it 
was  the  principle  of  universality  of  taxation,  with  the  practi- 
cal corollary  of  the  ge.ieral  excise,  that  was  invoked  by  the 
tax  reformers  of  the  seventeenth  and  eighteenth  centuries  to 
stem  these  enormous  abuses. 

In  modern  times,  however,  exemptions  from  taxation  are 
of  an  entirely  different  character.     The  mediaeval  exemptions 
were  an  inversion  of  the  p.inciple  of  faculty;  for  those  who 
were  most  able  to  pay  were  exempt,  and  those  who  were  least 
able  to  pay  were  crushed  beneath  the  burden.     The  modern 
principle  of  exemption,  on  the  other  h.did.  is  ba.scd  upon  the 
doctrine  of  faculty,  and  is  designed  to  lighten  the  burden 
of  those  who  are  least  alile  to  pay.     Thus,  from  the  very 
beginning  in  America,   certain  small  amounts  of  property, 
as  weil  as  property  of  certain   kinds,  like  mechanics'  tools 
and  growing  crops,  have  been  exempt  from  the  general  prop- 
erty tax,  as  was  the  case  also  in  the  later   property  taxes 
of    the   democratic   communes   of    medircval    Europe.      To 
these  exemptions,  based  upon  the  principle  that  the   prop- 
erty owners  are  not  in  a  position  to  pay,  have  been  added 
in  modern  times,  exemptions  of  charitable,  educational  and 
scientific  institutions,  and  the  like,  which  rest  on  the  princi- 
ple that  inasmuch  as  they  fulfil  a  quasi-public  function,  they 
ought  not  to  be  compelled  to  make  additional  contributions 
to  the  public  revenues.     An  interesting  variation  of  the  latter 
category  is  the  exemption  of  church  property,  —  a  question 
on  both  sides  of  which  much  might  be  said  but  which  is  not 
pertinent  here. 


'  'i  :i    I 


'^'^  '.^m^'^^P^-m'^a^  ^m':^:^---'^m  .'^-.-:^ffl  W-  ^^^-t 


Tlh    Fttndametital  Problems  27 

The  modern  problem  of  exemption,  however,  is  of  far  more 
importance  in  income  taxation  than  it  is  in  property  taxation 
because  in  the  case  of  the  property  tax  the  great  mass  of 
people  whose  earnings  are  entirely  derived  from  their  own 
exertions  are  ipso  facto  exempt.     As  they  have  no  property 
but  only  an  income,  they  are  not  subject  to  the   property 
tax.     Where,  however,  the  income  tax  is  introduced  as  the 
chief  element,  or  as  an  important  part,  of  the  tax  system 
the  problem  becomes  acute,  especially  so  far  as  concerns 
the  exemption  of  the  minimum  of  subsistence;  that  is,  the 
exemption  of  an  income  which  is  deemed  to  be  equivalent 
to  that  needed  to  support  a  family  on  the  very  lowest  scale 
of  decent  subsistence. 

The  argument  against  the  minimum  of  subsistence,!  as  it 
has  been  elaborated,  especially  by  Professor  Gustav  Cohn  2  is 
both  economic  and  political  in   its   nature.     The  economic 
argument  is  to  the  effect  that  from  a  correct  point  of  view 
the  e.xpenditures  for  the  support  of  government  must  be  con- 
sidered as  much  a  part  of  the  necessary  outlays  of  the  indi- 
vidual as  any  other  kind  of  expense.     This,  it  is  claimed,  is 
the  only  tenable  ground  for  interpreting  the  relations  of  the 
individual  to  the  state.     The  political  argument,  again,  is  to 
the  effect  that  the  exemption  of  a  considerable  class  of  indi- 
viduals is  especially  dangerous  in  a  democracy  with  universal 
suffrage ;   for  if  every  one  has  a  voice  in  voting  how  much 
money  shall  be  spent  and  how  the  expenditure  shall  be  made, 
and  if,  on  the  other  hand,  only  a  small  class  of  voters  con- 
tribute to  the  expenditures,  there  is  grave  danger  of  abuse 
and  extravagance. 

In  answer  to  those  objections  it  may  be  .stated,  fir.st,  that 
it  is  futile  to  speak  of  taxes  as  part  of  the  necessary  e.xp'en- 

>  For  special  books  devoted  to  this  pu.posc.scc  H.  Schmi.lt,  Bit  Stenerfrtiheit 
des    Exutemminimunn.       Ei,,    [Uitra,,-  zur    TlieorU    .,W    EinkonnnnuUnrr, 
Leip/ig,   1877;   an,l  K.  Sar.lcman,  D„s  sUturfreU  ExhUuzminimum  c/s  Bene- 
fiiiiim  tompitenlute  una  Armntsprophylaxt.     Leipzig,  1905. 

-^Sy^Um  Jer  H„a„zu'uhnsclu,ft,  §  220.     Stuttgnrt.  18.S9."     Knglish  translation 
hv  Veblen.  7k.  Sr:r,,..-  .//>,,.«,,.     Chicago,  ,595,  ^y.  J.7-JJ0. 


,  lif^^ 


V   I 


28 


T/u-  Income  Tax 


ditures  of  the  individual.  If  wages  are  sufficient  only  for  a 
bare  minimum  of  subsistence,  then  to  encroach  upon  this 
minimum  by  taxation  is  to  require  the  minimum  to  l)e  main- 
tained in  some  other  way.  If  the  laborer  can  no  longer  live 
on  his  wages,  he  must  be  supported  by  a  system  of  i)oor 
relief,  if  he  is  to  live  at  all.  It  is  difficult,  therefore,  to  see 
the  great  advantage  of  taking  away  the  money  with  one 
hand  and  r-turning  it  with  the  other.  If,  un  the  other  hand, 
wages  are,  although  higher  than  the  bare  minimum  .,t  sul)- 
sistence,  sliil  only  sufBciunt  to  maintain  the  laborer  and  his 
family  at  the  customary  standard  of  life  in  the  particular 
country,  the  imposition  of  a  tax  upon  this  amount  of  income 
must  neccs>.irily  load  to  a  lowering  of  the  standard  of  life. 
Such  an  eventualitv  also  cannot  be  contemplated  by  a  modern 
demt)cracy,  one  of  whose  chief  concerns  is  to  maintain  and 
even  to  raise  the  standard  of  life  of  the  mass  of  its  citizens. 

The  political  argument,  on  the  other  hand,  has  a  slight 
degree  of  strength.      It  must,  however,  be  remembered  that 
it  would  apply  at  best  only  where  the  income  tax  is  the  sole 
source  of  revenue.     Where,  as  is  everywhere   the  case,  wc 
have  other  forms  of   taxation,  resting  directly  or  indirectly 
upon  the    less   fortunate   classes  of    the   community,   either 
exclusively  or  iu  common  with  the  remainder  of  the  citizens, 
the   arj,ument  is  shorn  of  much  of  its  force.      pA'en  in  the 
case  of  the  single  income  tax,  however,  the  difficulty  can  be 
overcome  by  putting  the  control  of  the  expenditures  in  the 
hands  of  officials  who  have  a  certain  independence  in  c^m- 
sidering  the  best  interests  of  the  community.      In  the  United 
States,  tor  instance,  where  the  great  mass  of  the  citizens  — 
namely,  those  living   on   daily  wages    -are  entirely  exempt 
from  the  general  property  tax,  we  have  seen  but  few  illustra- 
tions of  the  dangers  alluded  to  above.     And  even  where  such 
dangers  have  disclosed  themselves,  they  are  being  averted  by 
refonns  uiulcrtaken.  as  in  New  York  City,  by  the  Board  of 
b'.stimate  antl  .Xpportionment,  which  occupies  a  largely  inde- 
pendent position. 

jf  ,,,...,  I,,.  .^.,:,i  fhs'refnre,  that  neither  the  economic  nor  the 


u^^^H"^' .:  ^%\ 


The  Fumhimcntal  Problems  2a 

political  arKument  aRainst  exemption  of  the  minimum  of  suh- 
•sistencc  ..s  valid;  while  the  unuMswerabie  arKM.n.ont  in  favor 
of  the  principle  is  that  those  particular  taxpayers  for  who.n 
the  exemptio.,  is  claimed  are  unable  to  pay  an  income  tax  and 
at  the  same  tune  to  maintain  themselves  and  their  families  it 
a  decent  standani  of  life. 

What  the  particular  n^ure  should  be  at  which  the  minimum 
IS  hxed  will.  o(    course,  vary  from  cuntry  to  country      In 
places  where  money  wa-es  are  small  and  where  the  standard 
of  life  IS  low.  a  very  slight  minimum  will  suffice.    In  countries 
where  wages  are  large,  and  where  the  laborers  are  accustomed 
to  participate  in  the  general  progress  of  societv.  the  mininmm 
will  naturally    be   much  higher.     With  the  d'evelopment  of 
the  democratic  idea.  more<.ver,  it  may  be  said  that  the  limit  of 
exemption  is  apt  to  be  raised  to  a  continually  higher  figure 
.   That  the  principle  of  exemption,  like  that  of  differentiation 
IS  susceptible  of  abuse,  is  undoubted.    There  is  alwa.s  dan-cr 
that  the  limit  will  beset  too  high,  so  as  to  involve  unjustifiable 
exemptions,  or  that  it  may  be  made  to  .serve  .sectional  preju- 
dices.     The  exemption  of  four  thousand  dollars  in  the  United 
Stages  income  tax  of   1804  comes  perilously  near  this  line   ii 
It  does  not  actually  overstep  it.     Hut  here,  again,  as  in  the 
case  of  differentiation,  it  must   be  said  that  we  should  not 
object  to  a  principle  because  of  the  danger  of  abuse.     If  the 
principle  is  right,  we  mu.st  support  it.  although  at  the  same 
time  we  must,  of  course,  do  everything  in  our  power  to  give 
It  a  rational  interpretation. 


§  8.    Grad next  ion  of  Taxation 

The  remaining  form  of  differential  treatment  of  incomes 
according  to  their  amotmt  is  that  of  graduation,  namely,  the 
affixing  of  a  different  rate  of  taxation  to  different  amounts  of 
income.  As  this  whole  subject  has  been  treated  by  the  pres- 
ent writer  in  a  .separate  volume,'  it  will  be  passed'over  here 

»  Seligman,  Prot;renive  -n.x.tt.cn  in  T'„-o,v  ,»,./  /V.utu,-.    2,1  t,|.  New  Y..rk 
1908 


I 

I 

I 

If 


I 


I?      ;' 


t 


30 


T/if  Income   Tax 


with  a  mere  summary  of  the  results  reached  in  that  investiga- 
tion. 

Graduated  taxation  may  be  of  several  kinds.  If  a  tax  is 
graduated  in  lieu  of  bemg  proportional,  the  graduation  may 
be  either  upward  or  downward.  Proportional  taxation  in  the 
ordinarily  accepted  signification  means  the  same  rate  on  all 
quantities  of  the  thing  taxed ;  graduated  taxation  may  mean 
that  thv^  rate  either  decreases  or  increases  as  the  amount  of 
property  or  income  increases.  When  the  rate  increases  with 
the  amount  of  the  income,  for  instance,  we  have  progressive 
taxation.  When  the  rate  decreases  as  the  income  increases, 
we  have  regressive  taxation.  F"inally,  the  tax  rate  may  in- 
crease up  to  a  certain  amount,  but  remain  constant  beyond 
that  fixed  rate.  There  may  be  progression  up  to  a  definite 
limit,  and  proportion  thereafter.  This  is  called  degressive 
taxation.  The  proportional  rate  is  here  regarded  as  the 
normal  one,  but  on  all  sums  counted  downward  below  this 
limit  the  tax  rate  gradually  diminishes.  Thus  graduated  ta.x- 
ation  includes  progressive,  regressive,  and  degressive  taxation. 
Practically,  however,  we  do  not  find  in  modern  times  any 
form  of  regressive  income  taxation.  All  graduated  income 
taxes  are  therefore  either  progressive  or  degressive.  Whether 
we  call  the  tax  progressive  or  degi'essive  depends  entirely 
upon  the  point  from  which  we  cou.it  the  graduation,  for  even 
in  progressive  '<xes  the  progression  everywhere  stops  at  a 
certain  limit.  The  precise  point  at  which  graduation  com- 
mences is  somewhat  arbitrary.  What  one  person  would  call 
degressive  another  person  would  call  progressive  taxation. 
Ordinarily,  however,  the  term  degressive  taxation  is  confined 
to  the  case  where  the  normal  rate  of  the  income  tax  is  low, 
—  say  three  or  four  or  five  per  cent,  —  while  the  term  pro- 
gressive taxation  is  applied  where  the  normal  rates  are  ccnsid- 
erably  higher. 

While  many  untenable  claims  have  been  presented  in  favor 
of  a  progressive  income  tax,  the  two  chief  arguments  on  which 
it  may  be  upheld  are  the  special  compensatory  and  the  fac- 
ulty theories.     The  special  cuiiipciisatory  theory,  as  has  been 


^w:,j^'i:^f;LJm^M^ 


The  Ftmdamental  Problems 


31 


pointed  out.'  applies  only  to  an  income  tax  which  is  part  of  a 
revenue  .ystcm  the  other  features  of  which  happen  to  put  a 
specifically  greater  burden  upon  the  poorer  classes.     Thus 
where  there  chance  to  exist  certain  indirect  taxes  the  incidence 
of  which  IS  primarily  upon  the  less  fortunate  classes  a  pro- 
gressive income  tax  may  be  defended,  on  the  ground  of  its 
tendency  to  redress  the  inequality.    This,  as  we  shall  learn,  is 
the  great  argument  at  present  advanced  in  France.     As  has 
been  elsewhere  explained,  however,  there  are  certain  embar- 
rassments connected  with  this  theory  arising  from  the  fact 
that  It  IS  difficult  to  prove  how  the  conceded  inequality  of  a 
progressive   incme   tax  will   exactly    fit   into,  and  counter- 
balance, the  conceded   inequality  of   the  particular  indirect 
tax.     So  far,  however,  as  the  circumstances  warrant  such  a 
precise  conclusion,  the  special  compensatory  theory  is  rela- 
tively defensible. 

Where,  however,  this  argument  cannot  be  used,  — and  in 
many  countries  its  application  would  be  difficult, -its  place 
can  be  taken  by  the  faculty  theory.     The  older  defence  of 
progressive   taxation  rested  solely  upon  the   equal  sacrifice 
theory,  m  the  sense  of  considerations  connected  with  outlay 
or  consumption.     The  attempt  was  made  to  prove  that  the 
sacrifice  occasioned  by  the  abandonment  for  purposes  of  ta.x- 
ation  of  one  hundred  dollars  out  of  an  income  of  one  thou- 
sand dollars  is  very  different  from  the  sacrifice-    nvolvcd  in 
giving  up  ten  thousand  dollars  out  of  an  income  of  one  hun- 
dred thousand  dollars.     This  was  put  on  the  ground  that  in 
the  one  case  we  are  trenching  upon  necessities,  and  in  the 
other  we  are  only  cutting  into  luxuries.     The  difficulty  with 
this  argument  as  affording  a  definite  scale  is  the  impossibil- 
ity of  measuring  the  precise  amount  of  individual  sacrifice 
m  such  a  manner  as  to  achieve  a  mathematical  equality  of 
rate.     Mathematics  cannot  help    us  here   because   the  very 
first  conditions  fail  u.s,  the  power  to  gauge  with  accuracy  the 
mathematical  relations  of   marginal  utilities.     Psychological 
relations  of  such  a  kind  cannot  be  reduced  to  exact  quantita- 

'  Seligman.  Progressive  Taxation,  pp.  143-149. 


Il   • 
I*  ' 


32 


The  Income  Tax 


■  f. 


live  forms.     The  equal-sacrifice  or  consumption  theory  there- 
fore does  not  lead  to  any  definite  rate  of  progressive  taxation. 

On  the  other  hand,  the  conception  of  faculty  includes  more 
than  the  idea  of  consumption.  It  comprises  also  elements 
connected  with  acquisition  or  production.  Modern  experi- 
ence especially  has  made  it  quite  evident  that  the  possession 
of  large  fortunes  or  incomes  in  itself  affords  the  individual 
a  decided  advantaj^e  in  augmenting  his  possessions.  A  rich 
man  may  be  said  to  be  subject  in  a  certain  sense  to  the  law 
of  increasing  returns ;  the  more  he  has,  the  easier  it  is  for 
him  to  acquire  still  more,  t'rom  the  point  of  view  of  pro- 
duction, incomes  may  be  said  to  differ  in  amount,  just  as  we 
have  already  seen  that  they  differ  in  nature.  Hence,  from 
the  point  of  view  of  production,  faculty  may  be  said  to 
increase  more  rapidly  than  fortune  or  income,  and  this  ele- 
ment of  taxable  capacity  would  not  illogically  result  in  a 
more  than  proportionate  rate  of  taxation. 

While  the  sacrifice  theory  in  itself,  as  we  have  seen,  is  not 
sufficiently  cogent  to  lead  to  the  demand  for  any  definite 
schedule  of  progression,  its  influence  in  the  other  direction 
is  surely  not  strong  enough  to  outweigh  the  productive  ele- 
ments of  faculty,  which  seem  to  imply  progressive  taxation. 
For,  as  we  have  fully  explained  elsewhere,  the  sacrifice 
theory  or  consumption  element  in  faculty  cannot  be  used  as 
an  argument  inevitably  leading  to  proportional  taxation.  If 
it  does  not  necessarily  lead  to  any  definite  scale  of  progres- 
sion, much  less  can  it  necessarily  lead  to  a  fi.xed  proportion. 
If  we  can  never  reach  an  ideal,  there  is  no  good  reason, 
however,  why  we  should  not  strive  to  get  as  close  to  it  as 
possible.  Equality  of  sacrifice,  indeed,  we  can  never  attain 
absolutely  or  exactly,  becau.se  of  the  diversity  of  individual 
wants  and  desires ;  but  it  is  nevertheless  probable  that  in  the 
majority  of  normal  and  tyjiical  cases  we  shall  be  approach- 
ing more  closely  to  the  desired  equality  by  some  departure 
from  proportional  taxation.  If  we  take  a  general  view  and 
treat  of  the  average  man,  —  and  the  government  can  deal 
only    with    classes,    that    is,   with    average    men,  —  it    seems 


■liPliiiiP 


mm 


■Si! 


T/w  Fumiamcnlal  Problems  33 

probable  that  on  the  whole  less  injustice  will  be  done  by 
adopting  some  form  of  progression  than  by  following  *he 
universal  rule  of  proportion.  A  strictly  proportional  rate 
will  make  no  allowance  for  the  exemption  of  the  minimum 
of  subsistence.  It  will  be  a  heavier  burden  on  the  typical 
average  poor  man  than  on  the  typical  average  rich  man.  It 
will  be  apt  to  be  felt  with  relatively  more  severity  by  the 
average  man  who  has  only  a  small  surplus  above  socially 
necessary  expenses,  than  by  the  average  man  who  has  a 
proportionately  larger  surj.lus.  It  will,  in  short,  be  likely 
in  normal  ca.ses  disproportionately  to  curtail  the  enjoyment 
of  different  .social  clas.ses. 

Hence,  if  we  base  our  doctrine  of  the  etiuities  of  taxation 
on  the  theory  of  faculty,  both  the  i-roduction   and  the  con- 
sumption sides  of  the  theory  seem  to  point  to  progressive 
taxation  as  at  all  events  neither  more  illogical  nor  more  unjust 
than  proportional  taxation.     Further  than  that,  however   we 
cannot  go.     While   the    usual  arguments  advanced   against 
progressive  taxation  are  almost  entirely  destitute  of  founda- 
tion,   it  IS  not  a  simple  matter  to  decide  how  far  or  in  what 
manner  the    principle  of    progression    ought  to  be  actually 
carried  out  in  practice.     Theory  itself  cannot  determine  any 
definite  scale  of  progression  whatever,  and  while  it  is  hi<rhly 
probable  that  the  ends  of  justice  will  be  more  nearlv  "sub- 
served by  some  approxi,,,  ttion  to  a  progressive  scale,  con- 
siderations of  expediency,  as   well  as  the  uncertaintv  of  the 
interrelations  between  various  parts  of  the  entire  tax' system, 
should  tend  to  render  us  cautious  in  advocating  any  general 
application,  and  still  more  cautious  in  ])roposing  any  radical 
application,  of  the    principle.     We   shall  see  that  while  the 
prmciple  has  now  been  substantially  accepted  by  most  mod- 
ern governments,  it  assumes  in  most  countries,  to  a  large 
extent,  the  form  of  taxation  applied  through    a   system   of 
abatements,  and  that  it  is  almost  everywhere  limited  in  prac- 
tice by  vonsid-rations  of  administrative  expediency    restin<- 
upon  the  partic-il  ir  form  assumed  by  the  income  tax. 

'  Seligman,  op.  cit.,  pp.  294-299. 


^    ;'>i..._ 


34 


The  Income   Tax 


11  ' 


,  I    ■> 

lit   * 


i 


So  far,  however,  as  the  principle  is  ccncerned,  we  must 
conclude  not  only  that  graduation  is  valid  in  theory,  but 
that  it  is  now  almost  everywhere  accepted  as  not  repug- 
nant to  the  doctrine  of  uniformity.  In  the  United  States 
especially,  where  the  earlier  decisions  rendered  under  the 
domination  of  a  bygone  economic  theory  took  an  antagonistic 
attitude,  a  moderate  graduation  of  taxation  is  now  held  to  be 
no  less  compatible  with  the  uniformity  provisions  of  our  con- 
stitution than  is  the  practice  of  differentiation.  The  uni- 
formity, in  short,  which  modern  legislation  and  modern 
economics  demand  is  a  uniformity  based  upon  relatively 
proportional  equality. 

This,  therefore,  brings  us  to  the  last  of  the  fundamental 
questions  —  the  question  of  the  kind  of  income  tax  toward 
which  modern  countries  are  tending;  for  upon  the  answer  to 
this  question  depends  not  only  the  solution  of  the  problem  of 
graduation,  but  also  be  decision  as  to  the  actual  success  of  an 
income  tax  itself. 

§  9.    Tlic  Three  Types  of  fncome  Tax 

When  we  come  to  ronsider  the  various  types  of  income 
taxation,  we  shall  find  that  they  may  be  reduced  to  three 
categories.  The  first  may  be  called  the  presumptive  incopie 
tax.     This  may  be  explained  as  follows. 

It  is  notorious  that  the  ascertainment  of  individual  income 
is  exceedingly  difficult.  If  the  attempt  to  reach  the  income 
of  the  individual  rests  upon  the  declaration  of  the  taxpayer 
himself,  we  are  putting  upon  him  a  strain  which,  in  the  pres- 
ent state  of  the  relations  of  the  individual  to  the  government, 
may  be  characterized  as  exceedingly  severe.  It  presumes  a 
condition  of  integrity,  a  readiness  to  support  one's  share,  and 
a  complete  absence  of  any  desire  to  benefit  oneself  at  the 
expense  of  .  ..e's  neighbor,  which  is  unfortunately  still  too  rare 
at  the  present  time.  The  place  that  smuggling  or  under- 
valuation takes  in  the  customs  duties  is  represented  by  the 
evasion  and  fraud  which  are  almost  inseparable  concomitants 


^esM 


t.»fiM!t 


..'•ii'r 


T/if  Fundamental  Problems 


35 


of  an  income  tax;  and  the  difficulty  is  far  greater  in  the  in- 
come tax,  because  in  the  case  of  customs  duties  the  officials 
usually  have  an  opportunity,  except  in  the  case  of  crass 
smuggling,  to  inspect  the  proj)erty  on  which  the  tax  is  im- 
posed. In  the  case  of  an  income  tax,  however,  the  officials 
are  dealin  with  something  entirely  intangible;  and  even 
where  the  income  is  derived  from  visible  property,  this 
property  may  be  entirely  beyond  the  ken  of  the  assessor. 
If,  therefore,  the  declaration  of  the  individual  is  sought  to  be 
controlled  by  official  action,  officials  inevitably  find  consider- 
able difficulty  in  re.iching  a  conclusion  as  to  the  exact  amount 
of  income.  If  they  are  lenient,  the  results  are  apt  to  be  a 
farce;  if  they  are  stringent,  the  danger  is  that  it  will  lead  to 
a  system  of  bureaucratic  inquisition,  which  may  end  by  be- 
coiMng  intolerable  to  the  taxpayer. 

In  order  to  avoid  these  dangers,  therefore,  the  system 
introduced  at  the  outset  was  not  to  make  any  effort  to  asce- 
tain  the  exact  income  of  individuals,  but  to  attempt  to  reach 
it  approximately  by  a  series  of  presumptions.  People  who 
have  large  incomes  usually  give  evidence  of  the  fact  in 
several  ways,  such  as  the  amount  of  rental  paid  for  the 
residence,  the  general  standard  of  life  as  shown  by  the 
equipages  or  automobiles,  the  mode  of  dross,  especially  of 
the  female  members  of  the  family,  and  so  on.  All  such 
criteria  or  indicia  arc  patent  facts,  open  to  the  observation 
of  any  one,  and  constitute  approximate  indications  of  rela- 
tive income.  In  some  cases  the  government  contented  itself 
with  taking  a  single  criterion  like  house  rentals,  so  that 
the  tax  on  house  rentals  formed  a  species  of  indirect  income 
tax. 

This  system,  never  entirely  adequate  even  for  the  more 
moderate  grades  of  income,  proved  to  be  completely  unsatis- 
factory when  it  came  to  a  consideration  of  the  higher  classes 
of  mcome;  for  the  higher  we  rise  in  the  scale  of  income, 
the  less  definite  is  the  relation  of  expenditure  to  income! 
Accordingly  the  quasi-income  taxes,  in  the  shape  of  ho.,se 
rental   taxes   or   expenditure   taxes   of    various   kinds,   were 


_  jx 


r^" 


36 


Tkc  Income   Tax 


abandoned,  and  the  attempt  was  now  made  to  ascertain  not 
the  presumptive,  but  t!ie  actual,  ii:cotne. 

The  simplest  mode  ot  applying;  this  principle  was  to  take 
a  man's  entire  income  and  to  levy  the  tax  upon  it.  Since 
the  income  tax  was  assessed  directly  on  the  income  in  its 
entirety,  or  as  a  lump  sum,  it  has  sometimes  been  called  the 
.)  direct  income  tax,  but  mi>;lu  with  pio})4iety  Iw  called  the 
lumi)-sum  income  txv.'  The  lump-sum  i.ir..mj  tax  has  an 
undoubted  advantage  over  the  tax  restin};  on  piesumptioiis, 
in  that,  if  successful,  it  reaches  individuals  on  their  actual 
income.  Hut  it  is  obvious  that  in  order  to  overcome  the 
difficulties  adverted  to  above,  we  must  have  not  only  an 
admirable  administrative  system  to  which  no  suspicion  of 
fraud  can  attach,  but  also  a  set  of  olTicials  so  little  imbued 
with  the  bureaucratic  spirit  that  they  will  refrain  from 
inquisitorial  procedure,  and  at  the  same  time  strike  the 
balance  between  excessive  ri^or  and  undue  laxity  of  adminis- 
tration. Where  these  danj;ers  seemed  too  strong,  a  third 
method,  or  another  form  of  income  tax,  was  chosen. 

All  incomes  are  obviously  derived  from  s  »me  source.  In 
so  far  as  they  consist  of  money,  they  are  derived  from 
individuals  who  pay  over  the  money.  The  idea  therefore 
suggested  itself  that,  instead  of  asking  the  individual  to 
defray  the  tax  directly  out  of  his  entire  income  in  a  lump 
sum,  the  tax  should  be  divided  into  categories  or  schedules, 
each  consisting  of  .some  important  source  of  the  revenue, 
and  that  an  attempt  should  be  made  to  catch  each  separate 
category  of  income  while  it  was  being  paid  over  to  the 
receiver.  Thus  a  man's  income  might  be  divided  into  several 
important  classes,  — as  the  income  from  land  or  other  real 
estate,  the  income  from  securities,  the  income  from  other 
forms  of  capital,  the  income  from  wages  or  professional 
earnings,  and  the  like.  Then,  if  the  income,  for  instance,  is 
derived  from  government  or  corporate  securities,  the  govern- 
ment or  the  corporation  might  be  asked,  when  paying  out 
the  interest  or  dividends,  to  withhold  the  tax.     In  the  same 


i  fllS  ten*   VV^S  !l*"*t   5";*iTi'i 


•txA 


v:;'.tri  li  ir'.v  ixLa;:!;:^  ajru. 


l««':^Ai!^i]M 


:^:'^a::^^^:^^:^6t 


Tin'  I-'iindamcutiil  Problems 


yi 


way,  the  individiinl  who  rented  a  piece  of  real  estate  rni^ht 
be  recjiiested  to  pay  over  the  tax  lor  his  lessor;  the  mort- 
gagor rnijrht  he  oblit;eil  to  pay  the  tax  for  the  mort^;agec ; 
the  barKcr  mi^'ht  be  made  t«i  pay  the  tax  for  his  client;  the 
employer  for  his  employee;  and  so  on.  Such  a  system 
would  naturally  receive  various  names.  In  so  far  as  the 
tax  is  levied  separately  in  the  different  catcf^ories  or  sched- 
ules, it  might  be  called  a  schc;diili-<[  income  ta\instead  of  a 
lump-sum  imome  tax.  In  so  far  as  the  revenue!»>are  inter- 
cepted at  their  source,  it  might  be  called,  and  in\act  has 
been  called,  a  .system  of  "collection  at  the  .source,"  /■  "  sto|v. 
page  at_soujCi.','^  or  "taxing  at  the  source,"  or  "charging  at 
the  source.''^-hi  so  far  as  the  tax  is  for  the  most  part  not 
collected^rectly  from  the  recipient  of  the  income,  but  is 
ad\>Hfced  by  the  payer  of  the  income,  it  is  sometimes  called 
:j_incomc  tJJi,  as  upjujsed  to  the  direct  income  tax. 
Finally,  inasmuch  as  the  tax  is  not  collected  upon  the 
entire  income  of  the  individual,  but  is  divided  up  so  as 
to  form  practically  a  series  of  assessments  on  different  kinds 
of  income,  it  has  sometimes  been  called  a  tax  on  incomes 
rather  than  a  tax  on  income.  As  Great  Britain  is  the  chief, 
although  by  no  means  the  only,  example  of  this  form  of  tax, 
it  seems  better  to  apply  the  term  which  is  in  common  use 
there,  namely,  the  "  stcppage-at-source  "  income  tax;  and  in 
England  itself,  where  both  methods  have  been  tried,  there  is 
no  doubt  in  the  minds  of  the  authorities  as  to  the  advantage  of 
a  stoppage-at-source  income  tax  over  a  lump-sum  income  tax. 
One  of  the  chief  points  to  be  considered  in  the  follow- 
ing investigation  is  to  a.sccrtain  how  far  these  claims  are 
legitimate.  It  is  obvious,  however,  that  the  stoppagc-at- 
source  income  tax  posses.ses  disadvantages  as  well  as  advan- 
tages. If  the  lump-sum  income  tax  recpiires  admirable  ad- 
ministrative efficiency,  it  pns.sesscs.  at  all  events,  the  good 
point  of  permitting,  without  any  difficulty,  the  application 
ot  the  princijiles  of  differentiation  and  progression.  On  the 
other  hand,  while  the  stoppage-at  source  income  tax  offers  no 
obstacles  lo  tiie  apj)iii  ition  of  the  principle  of  differentiation, 


■ 
i 

1- 

1. 
I 

"^    ■■ 

i 

1 

• 

1 

^m 

1 

[ii 

38 


T/ie  Income  Tax 


it  does  present  very  great  impedii  cnts  to  the  introduction  of 
graduation.  For  it  is  clear  that  if  the  tax  is  assessed  by 
schedules  and  stopped  at  the  source,  it  becomes  almost  im- 
possible to  put  definite  rates  upon  varying  amounts  of  total 
income. 

Since,  therefore,  each  of  the  two  modem  systems  of  in- 
come taxation  possesses  advantages  and  disadvantages  of  its 
own,  it  becomes  necessary  to  probe  a  little  deeper.  It  is  at 
bottom,  however,  a  question  not  alone  of  the  particular  form 
of  tax  and  of  administrative  environment,  but  also  of  the 
theory  embedded  in  the  legislative  provisions  themselves. 
A  mere  analysis  of  the  provisions  of  existing  laws  would  be 
far  from  giving  us  the  results  which  we  are  attempting  to 
secure.  In  order  to  understand  an  existing  law,  it  is  almost 
always  necessary  to  trace  the  origin  and  development  of  its 
provisions;  and  no  judgr.ient  of  .tl.^  success  or  failure  of  a 
system  can  be  attained  without  considering  the  manner  in 
which  the  legislative  provisions  are  actually  carried  out  in 
practice.  Nor,  finally,  can  the  working  of  a  syslem  be  com- 
prehended without  a  familiarity  with  the  general  attitude  of 
the  public,  as  reflected  in  the  literature. 

We  propose,  therefore,  to  take  up  the  most  important 
examples  of  income  taxation  in  existence  to-day  ;  to  trace  the 
legislative  and  the  literary  history  of  each  ;  to  analyze  the  pro- 
visions of  the  existing  law ;  and  to  explain  the  practical  work- 
ings of  the  system.  After  we  have  done  this  for  the  most 
important  foreign  systems,  we  propose  to  deal  -vitb  the 
American  experiences,  and  with  the  peculiar  constitutional 
situation  in  the  United  States.  Only  on  the  basis  of  such  a 
study  will  it  become  possible  to  take  a  definite  attitude  on  the 
problem  of  the  income  tax  in  the  United  States  at  the  present 
time. 


PART   I 


THE   INCOME   TAX   ABROAD 


M 


THE    MIDDLE   AGES 


The  Income  Tax  in-  the  Middle  Ages 
§  I.    The  Local  Taxes 

The  income  tax  played,  with  rare  exceptions,  an  exceed- 
ingly insignificant  role  in  the  Middle  Ages.  Taxation  itself 
was  for  a  long  time  of  minor  importance  when  compared  with 
the  other  sources  of  public  revenue,  for  feudal  income  was 
derived  very  largely  from  the  lucrative  prerogatives  of  the 
feudal  lord.  When  taxation  did  develop,  it  consistr  ",  to  an 
overwhelming  extent,  of  taxes  on  trade  and  transportation; 
and  when  direct  taxation  began,  first  in  the  local  communities 
and  then  in  the  larger  divisions  like  departments,  provinces, 
states  and  even  empires,  the  well-nigh  universal  system  was 
that  of  the  general  property  tax. 

The  history  of  the  gen  ral  property  tax  has  been  told  in 
another  place.'  It  will  be  pertinent,  however,  to  recall  some 
points  in  this  history  so  far  as  they  bear  upon  the  subject  of 
the  present  investigation.  In  the  first  place,  real  estate  under 
the  feudal  system  was  rarely  bought  and  sold,  so  that  practi- 
cally the  only  method  of  ascertaining  the  value  of  the  land 
was  by  taking  account  of  its  rents.  The  local  property  tax, 
so  far  as  leal  estate  was  concerned,  was  therefore  a  tax  on 
produce  rather  than  on  selling  value ;  and  later  on,  when  in 
some  cases  the  tax  was  assessed  on  the  selling  value,  this  was 
reached  by  capitalizing  the  rent.  In  the  second  place,  all 
movables  or  personal  property  were  assessed  at  the  selling 
value,  so  that  the  tax  became  a  combination  of  a  tax  on  prod- 
uce and  on  selling  value.  In  the  third  place,  as  the  expressed 
effort  of  the  legislator  was  to  reach  the  faculty  of  the  tax- 


'  Selifjm-in.   /T.tj./rt   in    Tiixnlioit,   chaj).   2. 

41 


Cf.    also   Sfligman,   Pro^esiive 


42 


The  Income  Tax 


&'  « I 


.  payer,  the  recipients  of  wages  or  salaries  were  considered 
also  to  possess  some  taxable  ability,  even  if  they  had  no  prop- 
erty. We  therefore  frequently  find  an  assessment  on  such 
individuals  in  some  rough  proportion  to  their  gains.  As 
there  were  virtually  no  important  professions  for  a  long  time 
during  the  Middle  Ages,  this  practically  meant  a  tax  upon  the 
day  laborer.  In  the  case  of  official  salaries,  however,  the 
same  method  was  often  pursued  as  in  the  case  of  real  estate, 
and  the  salaries  were  reduced  to  a  capital  sum  for  purposes 
of  taxation.  In  the  fourth  place,  as  trade  and  commerce 
developed,  where  the  gains  of  the  business  man  could  not 
be  approximately  determined  from  the  capital  invested,  we 
occasionally  find  as  a  supplement  to  the  property  tax,  a  tax 
upon  assumed  profits  of  business. 

The  mediaeval  system  was  therefore  really  a  little  more 
than  a  general  property  tax.  The  overwhelming  mass  of  the 
revenue  came  indeed  from  the  tax  on  personal  property  and 
real  estate,  but  this  was  now  and  then  supplemented  by  a  tax 
on  the  faculties  of  the  laborers  and  sometimes  by  a  tax  on 
the  assumed  faculties  of  the  business  man.  Occasionally  we 
find,  in  addition  to  the  general  property  tax  and  even  as  a  part 
of  it,  a  so-called  personal  ta.x,  either  in  the  shape  of  a  poll  or 
capitation  tax,  to  reach  individuals  who  had  no  propert}',  or 
in  the  shape  of  a  graduated  capitation  or  class  tax,  designed 
to  reach  certain  classes  whose  gains  were  not  entirely  in  pro- 
portion to  their  property. 

This  is  not  the  place  to  deal  with  the  history  of  the  tax, 
or  to  point  out  the  process  by  which  it  everywhere  became 
virtually  a  tax  on  real  estate  alone.  Its  only  interest  for  us 
in  this  connection  is  the  consideration  that  while  property 
was  considered  the  best  test  of  faculty  '\x\  taxation,  it  was  from 
a  very  early  period  supplemented  by  considerations  of  product. 
It  would,  however,  be  a  mistake  to  consider  these  e.vamples 
of  local  taxation  in  the  Middle  Ages  as  illustrations  of  a  local 
income  tax,  as  .some  scholars  have  carelessly  asserted.'      The 

'  (/  for  instance,  Sihiinberg,  p.  1 78;  and  Kspinas,  p.  142,  in  the  works  quoted 
in  the  next  njte. 


The  Middle  Ages  43 

conception  of  an  income  tax  as  the  basis  of  the  tax  system 
was  foreign  to  the  ideas  of  the  time.  All  that  can  reasonably 
be  claimed  is  that  while  property  was  the  general  test  of 
faculty,  it  was  supplemented  to  a  slight  extent  by  the  idea  of 
product  in  those  cases  where  property  did  not  exist  or  could 
not  be  disposed  of.  It  is  the  failure  to  distinguish  between 
these  conceptions  which  is  responsible  for  the  erroneous  in- 
terpretations to  which  allusion  has  been  made. 

The^iumerous  detailed  investigations  of  communal  finance 
have  shown  the  truth  of  this  fact  beyond  the  peradventure  of 
doubt.  In  Germany,  for  instance,  we  have  such  studies  for 
the  towns  of  Basel,  Frankfort,  Cologne,  Brunswick,  Augsburg, 
Osnabri!  k,  Magdeburg,  Ueberlingen,  Ulm,  and  Dortmund.' 
In  France  and  Belgium  we  have  similar  investigations  for  the 
towns  of  Douai,  Amiens,  Cambrai,  Dinant,  Luxemburg,  and 
Sfenlis.2     The  same  is  true  of  local  taxation  in  England,  the 

^^■"^^^tihc^^,  J-inanz-verhallni$se  der  StaJt  fiaitlim  XIV  unj  XV  Jahrhun- 
dirt.     Tubingen,  1S79;    T.  G.-frinj,',  Ihuuicl  und  Indus/ru  d,r  Sladl  Haul  his 
zum  Ende  des  XVII  Jahrhundats.     lias-l.  1S86;    K.   liuchor,  "D.r  OtTcntliche 
Haushalt  dcr  StaUt   I-rankfurt   iip   Mittela!t.;r,"  in   /.ekuluifl  fur  die  gaammli 
Staatminenuhaft,  vol.  lii  (iS,,('>),  ,,,,.  ,  ,( se,,  ;    A.  U>^nmng^ Su,ur^esc^uAt,  ,.„„ 
Koln  in  den  ersten  Jahrhioidei :en  stadtiseher  Selhstandigkeil  his  zum  Jahre  ij~o. 
Dessau,    1S91  ;     R.    Knipping,    Die  Kolner    .<t„dtr{,A,tuit);cn    des   MitleUtt'ers. 
Bonn,     1897;    H.    Mack,    Die   linanzgeschichle    der    St„dt    liraunschweig    his 
zum  J.,l,r  ,s74.       lircslau,   l8<;9  ;    C.  Meyer,  "Der  Haushalt  einer  deutschen 
Sta.lt    im    Mittelalter."    in     Vierteljahrs,h,-,ft  fur  Volks:virlhuh.,Jt,  rdilik  und 
Kulturgeschichte,  vol.  ciii  (1889),  pp.  48  et  seq.:  C.  .StUve.  Sladlre<huungen  von 
Osnahruck  aus  dem  JS.  und  14.  Jaltrhunderl.     (>in.ibruck,  l8<io  ;    (.'.   ISielefcld, 
Das  Steuenoesen  im   Erzslijl  Magdehurg.     Magdeburg,   1888;    Schafer,     Wirt- 
schafts-und  Hnanzgeschiihle  von    I'eherlingen,  von   /j_iO-/(>jS.     Hreslau,   1893; 
A.  Kiille,  Die  Vermogensteuer  der  A-ei,hsst„dt  llm.     Tubingen,  1896  ;    K.  Kubel', 
Dortmuuder  Finanz-und  Steuerwieii.     Dortmund,  1S92.      Cj.  also,  for  a  more 
general  survey,  K.  /eumer.   Die  Ileuts.heu  StUd/essleuern  .  .  .  im  /.?.  und  /?. 
Jahrhundert.     I.eip/ig,  187S;   and  W.  Stieda,  "  St.i.ltisch.-  Kinanzen   im   Mittel- 
alter," in  i:omyA\  J.ihrlucher  jiir  X.itional-Oek^^nomie  und Shttisttk.    Ill   Folge, 
vol.  xvili  (1899),  pp.  I  etsei). 

-C.  Espinas,  I es  Jimunes  de  la  Commune  de  Douai  des  Origines  au  XVe 
Sieele.  Paris,  ir)02.  This  work  contains  some  admirable  comparative  summaries 
of  continental  local  finance  and  an  excellent  bibliography  ;  K.  Ma..,  Essai  sur 
le  Kegime  Financier  de  la  Ville  d'.hniens  du  XlVe  ,t  la  Fin  du  .%  !e  Sieele. 
Amiens,  1899;  W.  Reinccke,  Uese/nehte  der  Stadt  Cambrai  his  zur  Erteilung  der 


44 


The  Income  Tax 


% 


% 


.'El    * 


:S   "1 


Story  of  which  has  been  told  by  Cannan,  although  he  also 
carelessly  states  that  "  the  poor  rate  was  intended  to  be  a 
local  income  tax  upon  the  inhabitants  of  the  parishes."  *  Abil- 
ity is,  indeed,  continually  mentioned  as  a  test  of  taxation  ;  but 
it  was  property  or,  at  most,  property  plus  product,  and  not 
income,  which  was  taken  as  a  criterion  of  ability.  The 
history  of  the  local  rates  in  England,  from  the  sixteenth  and 
seventeenth  centuries,  is  similar  to  that  of  the  local  tax  or 
tallage  of  the  earlier  Middle  Ages,  where  "  faculties "  and 
"chattels"  {fiuiiltatis  ct  catalla)  were  considered  for  the 
most  part  synonymous,-  and  where  product  was  employed 
as  a  supplement  to  property.  So  also  in  Scotland,  where 
the  mediaeval  property  tax,  under  the  name  of  the  cess  and 
of  the  stent,  lasted  until  very  recent  times,  the  stent  roll 
was  made  up  according  to  the  taxpayer's  "  means  and  sub- 
stance," and  we  are  told  that  the  estimate  of  means,  which 
comprised  all  the  taxpayer's  property,  "  appears  to  have 
included  the  incomes  due  to  personal  exertion  of  professional 
men  and  artisans,  although  no  case  seems  to  have  come  be- 
fore the  courts  with  reference  to  such  incomes."  •''  This  tax 
on  the  so  called  income  of  professional  classes,  like  that  on 
the  profits  of  trade,  was  only  a  very  subordinate  part  of  the 
general  .stent  which,  as  one  of  the  laws  puts  it,  was  to  be 
assessed  upon  the  taxpayer  "according  to  the  avail  and 
quantity  of  his  rent,  living,  goods,  and  gear  that  he  has 
within  burgh."*     Neither  in   England  nor  in  Scotland  did 

Ifx  Codffridi.  Marlmrg,  iSqO;  H.  Pirenne,  Ilisloire  ile  la  ConstittilioH  de  la 
VilU  ,le  Din,nit()u  Mcyen  ./;,'<•.  (land,  1S89;  N.  \an  Wervecke,  l.es  Fimmces 
dt  lit  I'ille  ile  l.uxembcurs;  pendant  It  h'i<;nf  df  I'/iilif</'e  If  Bon.  Luxembourg, 
1S95  ;  I.  llaninierm.nit,  Ilisloire  den  Inslitiilions  MunuipaUi  1//  Si-nlis.  Paris, 
iSSl.  ( '/;  also  in  general  lieauinanuir,  Cou/imics  </<■  /ieauzaisis.  2  vols.  Paris, 
1899-1900. 

'  Ivlwin  Cannan,  7'Ae  History  of  Local  Kates  in  lini^land.  London,  I.896, 
p.  69.  Cf.  also  the  admirable  history  contained  iulhe  A'e/>ort  0/ (lie  Poor  Law 
Commissioners  on  Local  L'axation.     London,  1S4J. 

•  Selignian,  Essays  in  J'axalion,  5th  ed.,  p.  44. 

'  .S.  IL  Turner,  The  History  of  Local  Taxation  in  Scotland.  Edinburgh, 
1908.  p.  38. 

*  ^'■•^.  V-  'SV- 


The  Middle  Ages 


45 


the  occasional  assessment  of  professional  earnings  or  of 
business  profits  suffice  to  convert  the  rate  or  stent  into  a 
"local  income  tax,"  any  more  than  the  wages  tax  or  the  busi- 
ness tax  of  the  German  states  during  the  nineteenth  century 
availed,  as  we  shall  learn,  to  make  of  the  taxes  on  product 
a  system  of  income  taxation. 

All  over  the  Continent,  as  well  as  in  Great  Britain,  the 
general  property  tax  gradually  shriveled  up.  First,  personal 
property  slipped  out  of  the  Hsts,  and  with  it  the  few  assess- 
ments on  the  profits  of  the  tradespeople.  A  little  later,  the 
faculty  tax  on  earnings  disappeared  until  finally  nothing 
was  left  but  a  tax  on  real  estate  levied,  as  is  to  a  great 
extent  still  the  fact,  on  th.i  rental  value  of  the  land  and 
house.  Thus  what  was  everywhere  at  the  beginning  a  per- 
sonal tax  on  the  individual,  measured  primarily  by  his  prop- 
erty and  to  a  minor  extent  by  the  produce  of  the  other 
elements  of  his  taxable  ability,  turned  into  a  real  tax  or  a  tax 
on  the  thing  itself,  that  is,  on  the  real  estate. 

To  this  general  rule  of  the  mediaeval  development  there  is 
only  one  important  exception,  namely,  in  the  Italian  towns. 
The  Italian  towns,  in  the  early  Middle  Ages,  were  not  only 
the  centres  of  the  new  industry,  but  for  a  time  witnessed  a 
far  more  determined  and  temporarily  successful  struggle  of 
democracy  against  aristocratic  government.  It  is  especially 
in  Florence  that  we  find  this  democratic  movement,  and  it 
is  accordingly  there  that  we  see  the  same  strong  tendency 
toward  the  taxation  of  incomes  that  we  witness  at  the  present 
day  in  modern  democracies. 

The  general  history  of  the  Florentine  movement,  and  more 
especially  of  the  struggle  for  progressive  taxation,  has  been 
told  elsewhere. '  Another  aspect  of  the  story  may,  however, 
be  mentioned  here,  in  so  far  as  it  is  of  importance  for  our 

1  Seligman,  Proi^resiire  Taxation,  part  l,  §  ;,  "The  Italian  Kt-puhlic*."  The 
detaileil  history  uf  ihu  tax  will  be  fuuiul  in  ( ;.  Canestrini,  /.a  Scicnza  c  P Arte  M 
St,Uo,    ,if Simla    dif^li    Jiti    offinaH   ,iflla    Ref-uhlua    fiorou'ina    e   Mi    MeMd. 

Ort/inntii.-ii/i     F .-.Mtniniri^ Dfllj    I'iiiaitZ:1.    P.:rf.'   f,     l^ Jrz^r.rf.-J    rwV.7     ,JP;.-.-/r,--r.- 

MobiU  e  ImniobUe.     l-'irtnze,  1863. 


46 


The  Income  Tax 


' 


\ 


m 


if 


purposes.  In  the  original  property  tax  or  the  estimo  of  the 
fourteenth  and  the  beginning  of  the  fifteenth  centuries,  we 
find,  as  in  the  similar  local  taxes  elsewhere  in  Europe,  that  the 
tax  was  based  upon  an  estimate  of  property  in  general.  The 
value  of  real  estate,  for  instance,  was  ascertained  by  capitaliz- 
ing the  rent,  and  an  attempt  was  made  to  reach  the  pre- 
sumed gains  of  the  business  men,  which  were  thereupon  also 
capitalized  at  the  rate  of  five  per  ccnt.^  The  reason,  however, 
why  the  estimo  gave  way  to  the  catasto  in  1451  or,  in  other 
words,  the  reason  v.  .ly  the  property  tax  changed  into  an 
income  tax,  was  the  fact  that  in  a  large  commercial  or  indus- 
trial centre,  where  the  mass  of  wealth  was  being  accumulated 
out  of  the  earnings  of  industry  and  commerce  rather  than,  as 
elsewhere,  out  of  the  rent  of  land,  property  was  no  longer  so 
good  an  index  of  faculty  as  income.  The  democracy  of 
Florence  was  as  much  impressed  by  the  business  earnings 
of  the  large  merchant  princes  as  are  the  modern  democ- 
racies of  Europe  or  America  influenced  by  the  gains  of  the 
trust  magnates  and  of  the  financial  kings.  The  democratic 
movement  of  the  mediaeval  Italian  republics  is  therefore 
responsible  for  the  evolution  of  the  property  tax  into  an  in- 
come tax.  The  catasto  was  a  real  income  tax,  and  shortly 
afterward  it  was  made  progressive  under  the  name  of  the 
scala. 

From  the  very  outset,  however,  the  political  conditions  were 
unfavorable  to  efficient  administration.  In  the  struggle  with 
the  Medici  the  assessment  of  the  income  tax  became  a  favor- 
ite weapon  of  whatever  party  happened  to  be  in  power; 
and  at  no  other  time  in  the  world's  history  except,  perhaps, 
in  the  later  centuries  of  the  decaying  Roman  Empire,  was 
there  such  an  orgy  of  corruption  and  of  maladministration. 
In  order  to  ascertain  the  business  profits,  the  books  of  the 
merchants  were  open  to  inspection,  and  the  assessors  had 
practically  unlimited  scope  in  deciding  upon  the  amount  of 
the  levy.  Individuals  might  compound  with  the  officials  in 
a  lump  sum,  and  the  frauds  were  accordingly  overwhelming 

'  Canestrini,  op.  <iL,  pp.  26,  27. 


Tlu  Middle  Ages  47 

in  character."  Everything  was  ruled  by  what  was  known  as 
the  arbttno,  that  is,  the  arbitrary  judgment  of  the  authorities, 
and  the  income  tax  was' utilized  as  the  most  potent  engine  of 
oppression  or  of  favoritism. 

The  Florentine  income  ta.x  lasted  for  only  a  relatively 
short  time.  With  the  final  downfall  of  democratic  liberties 
and  with  the  reintroductiou  of  the  aristocratic  regime  in  the 
sixteenth  century,  not  only  the  income  tax  but  all  direct  taxa- 
tion of  the  wealthier  classes  disappeared.  Before  long  the 
public  revenues  in  Florence,  as  well  as  in  most  of  the  other 
Italian  commonwealths,  came  to  be  derived  chiefly  from  in- 
direct taxes,  supplemented  in  some  cases  by  a  kind  of  vague 
ability  tax,  or  so-called  "  family  "  tax,  the  burden  of  which 
rested  primarily  on  the  poor. 


§  2.    The  Genera!  or  State  Taxes 

The  mediaeval  general  or  state  taxes  were  a  repetition  on 
a  somewhat  larger  scale  of  the  local  ta.xes.  If  we  recall  the 
development  in  England,  it  will  be  remembered  that  the  prin- 
cipal  tax  was  really  a  tax  on  property  and  produce.^  It  was 
known  for  some  time  as  the  fifteenth  and  tenth,  because  in 
the  case  of  real  estate  a  fifteenth  was  levied  on  the  rental 
value  or  produce,  while  in  the  ca.se  of  chattels  a  tenth  of  the 
selling  value  was  nominally  taken  by  the  tax-gatherer.  It 
will  also  be  remembered  how,  in  the  hope  of  preventing  the 
gradual  diminution  of  the  yield,  the  tax  was  changed  from  a 
percentage  to  an  apportioned  tax ;  that  is,  instead  of  actually 
assessing  a  fifteenth  of  the  produce  and  a  tenth  of  the  sell- 
ing value  respectively,  an  arbitrary  sum  was  fi.xed  upon  as 
representing  what  a  fifteenth  or  tenth  ought  to  yield,  and  this 
arbitrary  sum  was  then  apportioned  among  the  various  local 
divisions.  Finally,  it  will  be  remembered  how  personal  prop- 
erty slipped  out  of  the  assessment  lists,  and  how  it  gradually 

'  Cf.,  for  various  aspects  of  the  situation,  Canestrini,  op.  dl..  pp.  145,  164    1-6 
410,  471;.  •"    /  • 

'^  Seligman,  Essays  in  Taxation,  pp.  45  el  seq. 


i  .« 


4» 


77u'  Income   Tax 


bi'i  aim-  im|iiissil)le  to  raise  the  required  amounts.  When  the 
tittociith  and  tentli  disappeared,  the  s^^neral  property  tax  was 
n-intrtuhiti'il  in  the  sixteenth  century  under  the  name  of  the 
(ifiur.il  Subsidy.  Alter  a  time,  however,  the  three  phenom- 
ena vi'i'iMtetl  themselves:  the  change  from  a  personal  to  an 
ai'iuiilionitl  t.i\,  the  jjradual  e.seape  of  personal  property,  and 
the  ladinj;  awav  ot  the  yield.  Durinj;  the  middle  of  the  sevcn- 
tivnth  lenturv  the  olil  system  was  tried  anew  under  the  name 
nt  fnuiniouwealth  Monthly  Assessments,  with  precisely  the 
same  results.  Kin.illv.  after  the  Revolution,  the  attempt  was 
made  toi  the  tout  th  time  bv  the  so-called  Property  Tax.  The 
old  stoiv,  however,  i^ain  repeated  itself,  and  in  1697  Parlia- 
ment it\eil  the  sun\  which  a  given  rate  was  expected  to  pro- 
duce ;  that  IS,  it  hcc.iine  an  apportioneil  tax  of  stated  amount.* 

I  he  i:n.;li>h  t.i\  at  the  close  ot  the  seventeenth  century, 
like  .il!  its  incdi.i-val  predecessors,  was  a  combination  of 
property  \\\A  pu'iUice  tax.  In  the  case  of  land,  the  tax  was 
asscs>ed  on  the  rack  rent  or  yearly  value  in  1692  at  the 
rate  ol  tour  shillings  tor  every  pound  of  rent.'^  In  the  case 
ot  personal  property,  the  tax  was  assessed  on  the  value  of  the 
propel  tv,  but  as  the  rental  ot  land  was  deemed  to  be  six 
pel  cciu  ot  Its  selhiig  vakic,  the  same  supposition  was  applied 
to  pei>on.ii  pri.>pertv,  so  that  tour  shillings  on  the  pound  of 
rental  value  would  be  cqLuyalcnt  to  twenty-four  shillin;j;s  on 
every  iiiuKhei-l  pounds  ol  capital  value.  The  tax  on  "  per- 
scnai  estates'  was  theretore  levied  at  the  rate  of  twentv- 
tour  shi^angs  tor  e\er\'  hundred  tHUiuds  of  selliat;  value. 
Finally,  'ii  :iie  case  ot  ■'  a;iv  person  exercising  any  publick 
oihce  or  jinployiix'iu  I'l  ;'rorit,  '  tlie  tax  was  assessed  dircctiv 
uiHtn  these  ^aaries  at  the  rate  ut  tour  shillings  tor  every 
tji'und  ot  s.i  a:  \  - ' 

Ihc  ta\,  t'K-rcii'rc.  was  a  property  tax,  exi;ept  that  the  value 
ot  laiK's  was  •eiciicd  thnniLi'i  tiicir  rent,  and  with  the  farther 


% 


g  111.:   Ill  'A    i;:i  II    in  1  Ni.iiv, 
\  \\  ■:  l.liii    vm:   M.ii  V.  ^.    1. 


^~•^^. 


I     '  ■'    ■'(.    /',M   ■     •!    '  '1^'  rtic;,  j'i     .i.,  Li)nii<'n, 
iin-'dr  aiui  .uuiu>c.i  j^.uuni  ji  the  lax. 


The  Middk  A_>:es  49 

exception  that  property  in   pul)lic  ,.i1ucs  uas  t.iNo.l   tlnounh 
the    saKirics    tlicmsclv.-s.      It   was    Iiciuy-    a   romliination    „t 
property  aiul  produce  tax;  aiul  it  is  especially  to  l,c  note! 
that  no  nainsor  prolits  were  taxed  unless,  with  the  one  ex- 
ception ol    pui)lic  .salaries,   tiiey    were  derived    Ironi   visible 
pro|)erty.     M..re..ver.  wiiile    ai  eordinj;   to  the   intent   ot    the 
law  the  chief  revenue  was  t..  eonie  Ironi  persona!   pnipeitv. 
and  only   the  necessary  remainder  was  to  he  levied    on  tlie 
produce  of  real  estate,  in   act.ial    practice  virluallv  nothiuK 
was  assessed  except  real  estate,  so  that   the  tax  soon  hecaine 
a  land  tax.      In  fact,  by  the  \ear  i^o;  it  was  otruialiy  termed 
"an  aid  by  a  land  tax,"  or,  in  common  parlance,  the   Land 
Tax.     The  salaries  part  of  the  tax  linoercil  alon-  durin-  the 
eighteenth  century,  and    in  i;5.S   I'itl   ma.Ie  an  effort  to   in- 
crease  the  very  scanty  returns  by  imposing  a  new  duty  at  the 
rate  of  a  shilling  in  the  |)ound  on  ail  offices,  except  n.ival  and 
military  olTices,  with  a  salary  exceeding  /,,  itxi.'     The  law, 
however,  was  more  honored  in  the  breach  than  in  the  observ- 
ance, and  soon  bec.imc  a  dead  letter.     Thus,  what  was  origi- 
nally a  general  property  tax  with  a  slight  element  of  product 
taxation  degenerated  into  a  land  tax.     Of  a  general  income 
ta.x  we  f^nd  no  trace  at  all,  except  the  sporadic  examples  in 
1435  and    I4.;9,    when    a   short-lived  experiment    was    made 
with  the  introduction  of  the   I'rench  ssstem." 

The  only  important  country  in  which  we  find  the  develop- 
ment of  the  income  tax  for  .state  i)uri.oses  beff.re  the  nine- 
teenth century  is  France.  The  leading  l-'rench  direct  tax  in 
the  Middle  Ages  was  tlie  UiHU,  the  development  of  a  ch.irge 
that  was  univeisal  throughout  early  medi.ival  liiuope  and 
which,  in  England,  had  been  known  as  tallage.  The  tallage 
was  a  more  or  less  arbitrary  feudal  im|)ositi(>n  upon  the  king's 
tenants,  calculated  primarily  according  to  the  amount  of  the 
land,  but  modified  to  some  extent  by  general  considerations 
of  ability  to  pay.  In  Kngland  it  disappeared  at  an  early 
period,  to  merge  into  the  general  property  taxes  which  have 

'   51  (;i(ir>;e  II,  t.  22. 

•  Stligman.  JVv^'ifi.ri  Juxahoii,  pp.  15-16. 


50 


The  Imotne   Tax 


k'   i 


i^i 


W'vw  tlisnisfiod  above.  In  l*'r;ince  it  survived  until  the  Kevo- 
lutiiiii,  .I'll!  lut.iiiii;  the  IcMilinx  dircrt  tax,  bcinj;  composed  of 
two  i>.iit^,  the  /<*///«■  >,'i/lt\  levied  on  lands,  and  the  tatlle per- 
.■ii>H>uih,  levied  on  individuals  apart  from  their  lands.  The 
tan  soon  lui  anie  hoi\eyv'oml>ed  with  abuses,  wh(de  classes  of 
the  iiopulation  .-.eiinin^  exemption  from  the  burden,  until  it 
Iwame  a  completely  une(|ual  and  thoroujjhly  arbitrary  im- 
position upon  the  less  well  ti>-iK)  classes,  restin^j  upon  consid- 
ei.itiohs  neither  of  property  nor  of  inctmie,  but  dejHjndin^; 
entnv-l\  upi'n  the  whinj  of  the  assessor. 

At  the  elo.se  ot  the  seveiiteeiith  century  the  fiscal  situation 
f  lianve  hid  hecoitio  so  bad  Uiat  increased  revenue  was  im- 
peiatu ely  ik\ e».ii y.  Fi anee  had  by  this  time  become  a  great 
iiul'j>t:i  il  .\.\\i\  commercial  natioii.  and  was  far  in  idvance  not 
only  ot  luulaiul,  but  of  the  adjoiniui;  countries.  Accord- 
iii-;l\.  the  ^ovetnmeat  iu>w  thought  that  it  would  be  possible 
to  '.IV  tttSute  upon  these  newer  torms  of  wealth.  After  the 
el.th^'i.itioii  ot  pl.i;is  i>t  tax  retortii  in  the  sha[)e  of  a  general 
iiKoine  t.i\  bv  puMicists  !ik.e  Wiuban  and  H.>isguilbert.  the 
^ovetniiient  decided  to  make  the  attctiinc  At  first,  however, 
it  co:ite;i:ed  itsc'.t  with  introducing  in  i'n-i7i  c',is.sin.-d  poll 
t.ix  's.!!..^^!!  as  tile  ^  ifiuii-on,  or  captation  ,^rt,:utt.\  Thi.s  was 
,1  kniil  ol  >.ia>s  1 1\  ;  t.iat:  is  tQ  sav,  the  ta.\  was  in-.posed 
-qvn  indtMd.Ms  accoruiii,;  to  their  social  status,  th^:  rate  for 
a  1  iiie.'nbcis  u:  :iic  sa^te  c'ass  bein^  identical.  Ther..-  were 
t:s*caC\-Lw.)  cla.^>e^,  Me  1 1\  !  i  i^tri^  tr^m  one  iivre  ■.  >  two  thou- 
-..I'lJ  utc-..  I 'K'  ci;'iti'.'"n  \v;ts  supi.>rcssed  in  ftj.S,  but  rees- 
t.ibii.>be«.l  in  i^o!.  ,irid  it  -.v.i-i  t'^^^^l  ijraduailv  tra.'.>:  irmed  into  a 
t.t\  •a  ::!.i!>.  iii'ia;  inc.'inc-.  'nenibers  ..):  the  sam,.-  .-^ass  now  be- 
•ii.,  •  cc>,s  u;!f'.-r..'ii:  A  .  I>\  [  -Of  tile  c-ipitati<.in.  aith^.'u^h  stiil  so 
v' I  icu,  .lai!  viiM.i  V  become  an  inc'imc  tu.x  in  tiTree-fi.iurths  of 
'.  V  C'HiiK'x.   i:i..i  ,a>Lcd  t'ii'>u;;:icH!t  rnc  ei;.;hceenth  centurv.' 


!  1    •  -c 


\'ino,-,t 
'.ncni^-.,  '.  e-i 
•n.t'.cvi  'o   .-omj'oand 


bei;!!'!):;!^,  'lowever.  abases  di.sciosed 
.  iwr  instance.  j-:rta:n  c'a.sses  wero  per- 
"!   Li'.e  t.i..\,  .1  ;,Tact:ce  '.\novv!i  ,is  liwnnt- 


i'.'.Ul 


\'\\ 


■  M,!v 


^^'^r'     In    ,;o5   ,|,o  ...pilation   w.,s   n,  vnv   I,u,o  nu-.,MMv 

-snnply  a.Ulod  t.,  ,ho  ta,llo.'^  jn>t  ,.s  i„  M,s..u  1u,s..,k  , ^  ,),, 

in.'omo  tax  is  (..r  ilu-  most  |u.i  U-vi.-.l  o„In  .„,  il,,.,-  „i,..  ,u- 
already  oM  tlu-  lists  „t  tin-  ,„„,,.,, v  i.v  lh.-„  ,,  , -oS  W 
Kan  the  poru..!  ot  ox.-mpti„Ms.  nuln,.!„,.K  ,,s  xu-ll  ,,s  «  hoK- 
classes  hdHK  lrco.1  In.n,  tlu-  t..s.  M„t,l  |,.,,„v  l,.,„.  .,11  ,lu- 
Hhortcomi,,,^sof  ,h.-oM  taillou-..pp.M,..lM,  tlu-  .  ap„at,..n 
Tow.nl  tlu-  cn.l  of  ,l,e  .v.uurv.  wlu-,u-vn  tin-  .api.u.o,,  „  ,-. 


still  k-vicd  soparat.-lv.  it  was  ass. 
sum|)tivc  iiicnuo  ot  tlu-  imlividiial 


rent;  and  this  part  nl   tlu-  lanit 


^--'•d  piailirallv  4Mi    tlu 
as  nu-asin\'d  l>v  his  h 


pu- 


Revo) 


iitiim  as  a  hoiise-rintals  t 


pitalioii  was  niiilinro.i  all.T  t 


at  all  on  biisi 


i\.      S..   In 

lU-SS   ilU-.)|IU-S.    it     ^;,,v,.    lisi-   I,,    1 1 


as  it   u.i- 


>u- 

i  ii'd 


inequality  and  iiupiisitinn  '      j'l 
ber,  however,  is  that  what   was 


'<-    Dli'st    I'lliM  niiUls 

i-  iiiipoii.iiit  point    to  iciii.-m- 


.1 


tion  or  poll  tax  had  Ik 


III 


I 


laii.t-   th, 


law  at  all  event 


i-oine,  aic.)i(hii-  to  the  tl 


apit  I- 
ii'oi  \  <>|    the 


s,  an  itudine  fax. 


With  the  comparative  f, 


device,  the  Koverniiunt  resorted 


lihiie  ot    the  rapitatioi 


I     IS   a  (1- 


revenue  from  imonu 


■I'h 


th 


e  so-called  t/ixihui 


eil  to  ntlifi  atlfiiipis  t 
'I-',  ill    1710.  Louis    \  W 


tax  of  ten  per  cent  on  all  i 


or  'reiith.  whii  h  w 


IS     Mil 


This  ta 


iii-omcs  thiuii-liniit   t 


X,  suppressed  and   reciiacted  (loin   tinu'  t 


'  M-niit-  a 
I'll  u  ti'd 
d  t.>  be  a 


u-  coniiti  v, 


converted  in  1740  into  a  five  per  cent  l. 
tiihiu-);  and  this  continued  until  the  Rcv..l 


O     111!' 


was 


i\,  or  rwciiiifth  ( 


me 


nted  by  a  second  Twciitivlh  in  171; 


iitioii,  l).||i^  sup 


from  i/rxDto  1763.  and 


')  am 


aL;ain  from  17X^1,,  1  ,-,s^ 


a  thin 


I 


weiifu'tli 


»(1 


lamajjtran. 
iamaKcrnn, 


I' 


f"or  tht;  aliusts  cijnnc.  tc  I 


itii   tfi. 


329  "  !'<l. 


I    1 


nil  ii"r,i?i. 


'  A  .letailc.l 


H. 

loiri 


unt  of  th.'    V 


'Uques-K.urca.le,  Ui  f 


:ll!h    .Ul  I    th,.     I  ,v,rilM  !h    will    !.,■    |,,u,;  I 


"'/ 


/)l 


.'  I'tllf  ft  ,/>  /, 


/'  "/••■ .;«  xr/// 


tie  Guyenne.     far 


'   '  in / 11: 1! f I   ■•//■,  /,■/, 
The 


//i 


.  Ir: 


ih    ttl.'tt    >/llli 


*a»  a  twi 


'in-iunUr 


ever.  ab<)Ii<he  I 
well  as  I 


per  cent  tax 


1  fh».  C' 


"I'li^e.l  ..n  th"  |.r 
A  re  ent  j.  .[.uLi 


rti.  I. 


sur  le  kcvenu 


I  »"U3  I'An.ien  I: 


1  the  /.■■ 


.r  I    ftie'h,  r,r- 
"f   I  inl  in   1-.?: 

■■I t;,.- r,-nth 


/'•;(<    lA. 


I  \. 


ihr  hM, 


his  \\',\ ..  h 


ill 


52 


The  Income  Tax 


\ 


i: 


"' 


Ijkt. 


.( 


The  dixitme  was  supposed  to  be  a  general  income  tax 
reaching  incomes  of  four  kinds ;  namely,  from  real  estate, 
from  salaries,  from  securities,  and  from  business.  But  the 
tax  soon  showed  the  same  weaknesses  as  its  predecessors. 
One  by  one  various  individuals  and  classes  secured  exemp- 
tion from  the  tax.  Especially  the  so-called  vingtitme  d'in- 
dustrie,  the  income  tax  on  business,  soon  became  a  farce. 
The  historians  tell  us  of  the  ludicrous  yield  (/r  rendcment 
d^risoire)}  of  the  tax,  and  before  long  not  only  did  the  Tenth 
and  the  Twentieth  become  quite  as  arbitrary  as  the  capita- 
tion, but  what  was  originally  a  percentage  tax  became  an 
apportioned  tax  —  a  development  entirely  analogous  to  that 
of  the  land  tax  in  England.  It  is  not  necessary  to  go  into 
the  details  of  the  administrative  system,  which  existed  very 
hrgely  only  on  paper.  One  point,  however,  is  worth  men- 
tioning ;  namely,  that  in  the  few  places  where  the  tax  was 
actually  assessed,  even  in  part,  on  business,  it  was  levied  not 
on  individuals,  but  on  groups  of  business  men  {corps  de  mar- 
chands).  These  made  an  agreement  as  to  the  total  amount  to 
be  paid,  which  was  then  apportioned  among  their  own  mem- 
bers in  a  supposedly  equitable  ratio.  The  same  method 
was  also  applied  to  certain  officials  and  lawyers.^  In  a  gen- 
eral way  it  may  be  said  that  the  Tenth,  and  later  the  Twen- 
tieth, suffered  from  all  the  evils  to  which  any  tax  can  possibly 
be  subject.  It  was,  moreover,  not  levied  in  the  same  fashion 
in  any  two  departments ;  ^  and  the  officials  were  for  the  most 
part  so  illiterate  as  to  be  unable  to  form  the  tax  lists.*  It  is 
not  to  be  wondered  at  that  in  the  words  of  its  historian,  "  the 
taxpayers,  corrupted  by  the  long-time  practice  of  unlimited 
fiscal  arbitrariness,  should  enter  without  scruple  upon  the  path 
of  the  most  extreme  evasions."  *     The  Tenth  and  the  Twen- 

Cf.  also  R.  Stourm,  /.«  h'inanees  de  V AmitH  K,'gime  tt  ,le  la  Kcvo'ution.  Paris, 
1881; ;  C.  Giimel,  Les  Causes  Financieres  de  In  Kevolution  Frntnaise  I.es  Afin's- 
tires  de  lurgol  el  de  S'ecker.  Paris,  1892  ;  and  the  same  author's  Zcj  Dv-.eri 
Conlrdleurs  Giniruux.     Paris,  1893. 

'  Houques-Kourcade,  op.  tit.,  p.  167. 

•■i  Op.  cit.,  pp.  207-208.  ♦  Op,  cil.,  p.  298. 

*  Op.  lit ,  p.  244.  »  Ofi,  ii!..  u.  18"'. 


The  Middle  Ages  r, 

tieth,  in  fact,  became  mere  shadows  or  simulacra  of  an  in- 
come tax,  and  tlie  vingtihnc  d'tudnstric  especially  grew  to  be 
completely  absurd. 

In  other  words,  as  the  administrative  and  political  custom-; 
of  centuries  could  not  be  changed  in  a  moment,  the  income 
tax,  whether  in  the  shape  of  the  capitation  or  of  the  Tenth 
and  the  Twentieth,  went  the  way  of  the  old  taille.  Frauds 
evasions,  class  exemptions,  and  the  most  unbounded  arbitrari- 
ness soon  honeycombed  the  system  to  such  an  extent  that  all 
personal  taxation  of  the  individual  became  a  stench  in  the 
nostrils  of  the  French  public.  One  of  the  first  acts  of  the 
Revolution  accordingly  was  to  sweep  away  the  entire  system  of 
personal  taxation.'  Thus  the  two  great  examples  of  income 
taxation  in  former  times,  that  of  Florence  in  the  fifteenth  and 
that  of  France  in  ^'le  eighteenth,  century,  were  due  to  the 
same  underlying  c  omic  forces,  and  afford  eloquent  proof 
of  the  danger  of  corrupting  and  destroying  theoretically 
sound  fiscal  systems  by  deplorauiy  inefficient  administrative 
methods. 

France  was  the  only  European  country  in  the  eighteenth 
century  to  develop  an  income  tax,  because  it  was  the  only 
country  in  which  industry  and  commerce  had  attained  any 
considerable  importance.  But  during  the  eighteenth  century 
France  was  being  slowly  overtaken  by  England,  and  by  the 
close  of  the  century  it  was  England  that  was  ready  for  a 
new  attempt.  With  the  disappearance,  however,  of  the  old 
rt^gime  on  the  continent,  and  with  the  newer  conceptions  of 
universality  and  equality  of  taxation,  the  way  was  prepared 
for  the  more  modern  democratic  attempts  to  realize  the  prin- 
ciples of  income  taxation.  With  the  history  of  the  nine- 
teenth century,  first  in  England  and  then  on  the  continent, 
we  now  have  to  deal. 

'  For  an  ai-count  of  the  evju-rimrnts  with  the  proeressivc  income  taxes  and 
the  force,l  l„ans  of  the  revolutionary  |.e,i..,|,  see  Selignian,  Progrtsuvt  Taxation. 
part  1,  chiip.  5.  "I'he  I-renth  Kevolutiun." 


M 


!i;H 


BOOK    I 


THE   INCOME    TAX  LV  GREAT  BRITAIN 


mm. 


!k^.Mp!E^  . 


CHAPTER   I 

The  War  Income  Tax,  1798-1816 

§  I.    The  Origin  of  the  Triple  Assessment 

The  British  income  tax  was  a  direct  outcome  of  the  gigantic 
struggle  against  France. •  The  reason  of  its  introduction  can 
be  grasped  only  when  we  understand  the  fiscal  situation  of 
the  day.  Like  that  of  most  other  countries,  the  English  rev- 
enue system  of  the  eighteenth  century  had  come  to  consist 
almost  exclusively  of  customs  and  excises.  The  medizeval  sys- 
tem of  taxes  on  property  and  produce  had  shrunk  to  very  small 
dimensions,  and  the  old  general  property  tax  had  long  become 

'  There  is  no  gcx.d  history  of  the  British  Income  Tax.  The  account  in  Stephen 
Dowell,  A  History  cj  T„.u.ltcH  and  TaxiS  m  EnglanJ  frvm  tl„  /u,rhc,t  Timti 
to  Hu  Year  iSSj,  London,  4  vols.,  1SS5.  2<1  ed.,  lSSS,is  neither  full  nor  accurate. 
Sydney  Ru.vton,  Ftn.rn.f  anJ  Politia  :  a  historual  Study,  /7fj-/*.5,-,  2  rol»., 
Lon.i.  .n,  lS88,  gives  the  generai  setting  f.f  the  su!)jecl.  Brief  lurvevs  of' the  Icgi^-' 
latiun  may  be  found  in  the  lint  Arfri  from  tht  S.Ud  Committrt  en  ikt  Jniomt 
and  Vroterty  Tax,  1S52,  ,.p.  1-25;  in  the  Report  jr.,,n  the  Selut  Comnntlet  on 
hucme  and  Prcperly  Tax,  1S61,  pp.  i-io;  m  the  TKntemth  Repcri  cf  the 
Commiisicur,  0/ Inland  Hr.enut  en  the  Dittiet  under  thcr  Management  fi-r  the 
years  i8s(^iS6<)  inclusive,  u<tth  !eme  retrospeclixe  lliLtcry  and  i\,mpiele  V aUei  cf 
Accounts  of  the  Duties  from  thur  fir^t  Impcsituat,  I^^ndun,  1870,  i,  pp.  12&-131, 
and  ii,  pp.  1S4-207;  in  the  J -ientyiigluh  Keport  of  the  C.mmt^.icner:  cf  J/e'r 
Majesty  s  Inland  Knenue  on  the  rulie:  under  their  Mana^f'.int  for  thi  y,ar 
ending  u St  March,  /ff,-.  -i-tth  seme  retrospective  Jlislor-i,  jnd  complete  Tables  cf 
Ac, cunts  of  'lie  Duties  f, cm  i^'K)-yo  to  /SS^-j  inclusne.  London,  iSSt.  ;jp. 
73-*5i  in  the  lurty-third  Repeat  1/  the  Ccmmi.-uners  cf  Inland  Rr.n.iu. 
London,  1900, 

Incidentally,  n  feren^es  mayaU-  he  f  and  in  the  lepcrt  f'  the  Irfartmentai 
Committee  on  the  hwme  Tax.  100^  Gi  2575};  in  the  appendix  to  the  Report. 
with  Minutes  cf  F.-ideme.  I.ond  ,.d.  1905  Ci.  2576  •.  and  ,n  the  Jceport  frcm 
the  .Select  Committee  ,1  the  In.ome  lax,  t.gither  -uith  Jrueeaing:  of  tie  Com- 
"iittee,  .\finutc    cf  hiidence  in.i  m    Spr'natA.      I    -r,  ;   n.  ly-C     r      56:   .     .V.,ne 

'■A  the  aluiVf.   u..rLa^  hvWtVer.   \:2.\^-  ir.v  a*rrr:*::   r.   •..  tV..-     -.r.?.' r;-=T   r.  :       r^rir—    1.1»: 

of  the  discussion. 

57 


mn^ 


58 


The  Income  Tax 


virtually  nothintr  but  a  land  tax.  This  land  tax,  however,  still 
plays  so  imiuirtant  a  role  in  the  administrative  machinery  of 
the  prtscnt  iuiomc  tax  that  it  deserves  a  few  words  of  special 
n\ention. 

In  the  piviedinj;  chapter  we  have  called  attention  to  the 
pionss  l»y  which  the  general  property  tax  of  the  Middle  Ages 
I  h.ini;ctl,  hv  the  cud  of  the  seventeenth  century,  into  the  so- 
c.illcd  l.iMil  t.i\,  and  how  what  was  originally  a  percentage 
t.i\  on  piopirty  had  become  an  uiiportioned  tax,  designed  to 
yield  .1  dctinitc  an\ouiit  of  revenue.'  According  to  the  prin- 
ciple ot  a[>poitionment  fixed  in  i6<)7,  one  shilling  in  the 
pomul  ot  la:ul  tax  produced  about  half  a  million  sterling,' 
.uul  in  th.it  year  three  shillings  in  the  pound  were  granted. 
Thioughout  the  eighteenth  century  the  rate  varied  annu- 
ally troin  one  to  tour  shillings  in  the  pound.  The  unsuc- 
cesstul  :itteiii[>t  ot  lirenville  in  1767  to  compel  Townshend 
to  .ueept  .1  toin-shilling  rate,  left  the  latter  no  alternative  but 
to  .itteiii[>i  to  i.u>e  the  necessary  sums  bv  a  tax  on  the  colo- 
nies, aiul  thus  precipitated  the  Revolutionary  War.  After 
t'no  uar  I'^'ke  out,  however,  four  shillings  became  the  normal 
rate.  It  pu>vei.l  to  be  iinjiossible  to  increase  the  revenue 
tu'iii  this  source,  as  the  landowners  were  in  control  of  Par- 
liament, aiui  rnia;!\,  'v.\  I'uif,  the  •'annual  land  tax,"  a.s  it  had 
:!ow  come  to  be  caiie^i.  was  nuuie  a  redeemable  rent  charge. 
In  the  vXHitsv.'  ,_it  a  tew  decades,  about  one-halt  ot  the  land- 
owners !M  (.'iieat  Britain  aecordin^lv  bought  tnemseives  free 
ot  tax.  uul  tie  \'e'd  .'t  the  tax  is  at  present:  quite  insigniticant. 

The  !ii.icoi:io:  \  lit  tile  :a:ij  rax  has,  hi.nvover,  been  kept  up 
t;'>in  that  vLr.  t'-'  this.  T'le  various  land-tax  acts,  beginning 
in  the  -»evei''eeiKh  centurv.  ;.'rn\ided  that  certain  individuals, 
e-'pecia.iv  t.:v.>i,_;'ui.ted.  ^i'oiiiii  be  C!.>trin!issii;ners  ti.T  execut- 
ing '.iie  ict  in  -Jie  aoi.jix-Mt  iocahnes.  Fr^mi  this  fact  these 
aci.>  ha.e  been  c.i!;c(.i  "  Na-ne  '  acts,  uid  have  usuallv  been 
eKn-feti  ai  the  ir^i  -ie>sioi!  >r  each  pariiamenc,  being  discon- 
•iiKieu  ';i:\  It  I'K-  •V'_;'nii;ri4  u  the  present  oenturv.  There 
w.i.N  I'oui  fK-  \c".  .'i.tsec  a  ;jrL'i;err\  ^uaiincatii.'n  tor  the 
"■'■'  ■•    •■  .'■'■  -  b.\atnv  ^vu.JTi. 


The   War  Imomc   'l\i.\\  i^^qS  iSi6 


59 


pivsition  of  I. ami  Tax  Commissioner,  fixed  at  the  end  ot   the 
cifihteonth  century  at  the  possession  ot   an   estate   with   an 
annual  value  «)f  not  less  than  Xjcxi.     Justices  ot  the  I'cacc 
were  ixojfuio  Land   Pax  Commissioners.     The  commissioners 
for  the  j^eneral  purposes  of  the  land  tax  or,  as  thev  came  to 
be   known,  the  (ieneral  Commissioners,  were  empowered  to 
divide  themselves  into  smaller  groups  for  the  Kval  divisions 
of  every  county  or  town,  and  in  e.xch  case  to  select  a  clerk 
These    divisional    rommissiom  is   were    to   appoint   in    ever\ 
district  or  sulMlivisioii  local  commissioners,  who  were  t -»  n.^nv 
inate  the  assessors  and  collectors.     The  assessors  and  c;>]- 
lectors  were  not  to  receive  fixed  s.d.iries,  hut  were  t.>  i^et  a 
certain  percentaf^e  or  p«>unda,i;e  on  the  amount   raised      The 
commissioners  were   entirely   unsalaried    and.  as    thev   were 
chosen  from  the  local  i;entry.  their  position  w.\s  considered 
one   of   considerable   dij;nity.     With   the  diminution   in   the 
yield  of  the  land  tax,  the  duties  of  the  commissioners  became 
so  li<xht  that  by  the  end  of  the  ei-liteenth  centurv  the  tax 
was  administered   by   only   a   few  members,  while  the   rca; 
work  was  done  in  each  case  by  a  clerk.      In  the  m ajoritv  M 
cases  the  position  had  thus  becoine  simpiv  .1  title  of  ho-.-j^r. 
Yet,  as  we  shall  see  later,  it  is  these  very  land  tax  commis- 
sioners, with  their  clerks  and  asses>ors,  who  are  indirectlv  in 
charge  of  the  a.ssessment  of  the  jiresent  income  tax 

In  addition  to  the  land  tax,  there  had  existed  ail  throu-h 
the  Middle  Ai^'es  a  system  of  customs  duties,  at  first  primarilv 
on  exports  and  then,  after  the  i;rnwth  ot  the  mercar.tilist  svs- 
tem,  on  imports.  Hei,Mnnini;  in  the  sevcnt  -  rnth  centurv.  a 
system  of  excises  was  introduced,  supplemented  bv  a  few 
stamp  duties.  After  the  iuitbreak  of  the  .American  war. 
when  larger  revenues  became  imperative,  North,  f<>Ii,avm.j 
in  part  the  suggestions  of  Adam  .Smith,  turned  t  ■  Hi'.'.ar.d 
as  a  model,  and  imposed  new  taxes.  Among  them  were  a 
tax  on  inhabited  houses,  accordi;ig  to  rental  vi!-.:e;  the  be- 
ginning of  a  succession  duty ;  and  a  series  of  so-cal'ed  taxes 
on  establishments,  such  as  men-servants,  horses,  and  the  like, 
designed   to   reach   the    luxury  of   the    rich.     In    i;.S;    Pitt 


ii 


60 


Tke  Income  Tax 


!• 


|!  ' 


I  i 


grouped  these  taxes  on  houses  and  establishments  together 
int(»  what  afterwards  became  known  as  the  assessed  taxes, 
and  put  them  under  the  management  of  the  so-called  "  Com- 
missioners for  the  Affairs  of  Taxes."  The  chief  increase  in 
the  revenue,  however,  came  from  other  sources.  In  1792, 
just  before  the  outbreak  of  the  French  war,  out  of  a  total  tax 
revenue  of  about  seventeen  and  a  quarter  millions  sterling, 
the  land  tax  yielded  only  two  millions,  and  houses  and 
establishments  only  one  and  one-quarter  millions.  Almost 
the  entire  remainder  came  from  customs  and  excises.  Taxes 
on  articles  of  food  and  drink  were  responsible  for  nine  mill- 
ions.' Taxes  on  manufactured  articles —primarily,  soap, 
candles,  leather,  printed  goods,  glass,  and  drugs — yielded 
about  one  and  three-quarter  millions,  and  stamp  duties  yielded 
about  one  million.  It  will  be  seen,  therefore,  that  what 
we  have  come  to  regard  in  modern  times  as  direct  taxes 
played  a  very  slight  role,  and  that,  so  far  as  there  were  any 
direct  taxes  at  all,  they  were  not  personal,  but  real,  taxes,  i.e., 
taxes  not  on  the  individual  as  such,  but  on  product. 

After  the  declaration  of  war  in  1793,  new  laws  were  enacted, 
and  additional  taxes  were  laid  from  year  to  year.  The  old 
customs,  excises,  and  stamp  duties  were  raised  from  time  to 
time,  and  now  duties  were  imposed  successively  on  tea,  on 
stone,  on  salt,  and  on  collateral  successions.  On  the  other 
hand,  the  assessed  taxes,  which  had  been  increased  by  ten  per 
cent  in  \-jqo,  were  increased  by  further  additions  of  ten  per 
cent  in  1796,  and  again  in  1797,  while  the  system  was  extended 
from  carriages,  servants,  and  horses  so  to  include  taxes  on  hair- 
powder,  dogs,  watches  and  clocks. 

All  these  changes,  however,  proved  to  h.  utterly  inadequate 
for  the  groat  struggle,  and  British  credit  fell  as  the  French 
victories  increased.  The  country  could  not  disguise  its 
alarm,  and  by  1796  various  fiscal  schemes  were  propounded. 
Notwithstanding  the  increase  in  the  assessed  taxes,  the  over- 

■  IVcr,  throeanla  h.i!f  millions;  wine  ami  <pirit<.  tw..  ami  a. [uarter  millions; 
sufjiir.onc  and  a  .juartor  niilli.ms;  tobacco  and  tea.  abuut  half  a  million:  anJ  lalt 
a  :itl!v  less. 


The  War  Income  Tax.,  iyg8-iSi6 


6i 


whelming  mass  of  revenue,  as  we  have  seen,  was  still  derived 
from  expenditure  rather  than  possessions.  It  is  therefore 
not  to  be  wondered  at  that  the  scheme  of  some  direct  assess- 
ment on  the  wealth  of  the  individual  should  be  advanced. 
One  writer,  who  sought  to  inspire  confidence  bv  contrasting 
English  and  French  methods,'  suggested  a  "general  and  vol- 
untary contribution.""  Although  in  one  place  Bowles  calls 
it  a  "  Public  Contribution  to  be  furnished  by  the  general  mass 
of  proprietors,"'  he  made  it  plain  that  he  expected  the  yield 
to  come  primarily  from  the  rich.*  In  the  following  year  he 
returned  to  the  scheme,  lamenting  the  "inflexible  obstinacy 
and  the  increased  malignity  of  the  Opposition,"  but  stating 
that  had  it  been  adopted,  "  we  should  not  now  sec  the  funds 
at  their  present  low  ebb."*  Another  writer  even  went  so  fa*- 
as  to  advocate  a  progressive  property  tax.  "Taxes,"  Ijc  telis 
us  "should  affect  individuals  in  a  progressive  ratio,  pn.p/or- 
tionate  to  their  properties,  for  they  who  have  the  greatest  in- 
terest at  stake  should  bear  the  greatest  charge."  *'  The  author 
was,  however,  willing  to  supplement  his  proposed  impo.st  by 


'  "Nor  should  it  l>e  forgotten  thiit  wKiK'  welavt  iirr;«-  ;  <•'■ 
of  our  Revenues,  the  Krenih  have  been  cxhiu»!:n_'  th-ii  »^  ■» 
lA>aDS  xoiunlarily  advanced,  and  by  the  Taxes  i-^i,i\  :m; 
Iwrnc,  we  have  been  cunteniini^  »i!h  the  enure  ,a:  ."i!  an  : 
force  of  France;  Kith  of  which  have  ?.c-.n  hr  vi^::  :r.:  a  • 
murder,  robbery,  requisition  and  terr.  r  .  .  .  un  icr  the  ; 
Liberty." —  I'm-o  Ijtt-ri  addrn  i,i  f  a  hnn  h  .'>f'r.liini  j  » 
MtfttHg  cf  the  Hfui  J'arltamtHt  in  lyg^J-  l>y  J  h.T  li.w.c- 
1796,  p.  56. 

«  Op.  ctt..  p   31. 

*  "It  should  not  l>e  f  rg.tten  that  •.^.•--  men."-  •'  V  '.r. 
thou$;b  calculate  !  \j  be  gcn-rai,  i>  pn  {:-—-•  t  ■  •:.■.•;  it!  : 
wealthy  and  atSiicnt."  —  O/.  .  (/.,  p.  '/•■ 

^A   Tkir.i  Lettfr  t.  J  Briti:k  Mtr  h.:>t:.i  rtHK.r.,-       r..; 
the  IjU  .\\-^n,i.'icn   ruth   Irin  ',  ..■.•  i:^r,j  m    >'..'!   n  : 
liskeJ  Prinnriir  ■   r.gtthfr  -.n-'i   Htlifticn-     '::■.':!■:<     ■  .' 
fjrucMiirl)  ,<n  (if  Mii<  iir:  .^u;   I<nJtn  ;   :•  .'.{        '•■:'•'  '•  /x' 
/»,•>,     By  Jihn  liuwles.     I.<-n  ; -n,  i;97,  ;  •  93. 

'  ./   Cenrril  .fj'Jre  :  t-i  t't  /  .  ■>>'  'h/j.'. -  <■  '     ■    .' ' 

don.  1 707,  p.  4S. 


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f)3 


The  lucume  Tax 


\ 


l^\\ 


indirect  taxos,  preferably  .hi  luxuries,  as  the  "propercst  ob- 
jcits  tiir  taxaliiiu  in  time  ot  war."' 

Hy  the  autumn  of  179;  Pitt  realized  the  gravity  of  the 
bituatii.n.  The  three  per  cent  consols,  which  had  been 
nearly  at  par  iu  170J  and  which  had  Huctuated  around  70 
durmg  the  next  three  years,  td!  to  55  in  January.  1797.  and 
to  47*  J'ctore  the  end  of  May.  The  Hank  of  Kngland.  amid 
universal  consternation,  h.id  suspended  specie  payments,' 
auil  a  French  invasion  under  Hoche  seemed  imminent.  The 
tune  had  now  come  to  make  an  appeal  to  the  countrv,  and  in 
his  lanuuis  budget  speech  i.f  November  24.  1797,'  Pitt  in- 
troduced his  scheme  tor  the  triple  assessment. 

Ihc  assessed  n^-s.  as  we  have  learned.  comi)rised  a  series 
of  d.i>  ,t  .mpo.sts.  partly  on  houses  and  parti v  on  so-called  es- 
l.ibhsh.Moats.  inchKling  carruj;es.  servants,  horses,  hair-pow- 
aer.  dons,  watches  and  clocks.      P.tt  now  decided  to  convert 
the  system  into  what  he  called  "a  -eneral  tax  on  persons 
po.sse.s>cd  ot   property  commeiis   rate  as  far  as  practical  with 
thc.r  means."     r^i  the  rirst  reading  of  the  bill.  Pitt  discussed 
the  broad  outlines  ot  the  >cheme  and  declared  the  objects  to 
be  attained  to  be  as  tuilows:    -  That  the  plan  should  be  dif- 
tu.scd  as  cvtensivelv  as  ^H.ssible  ;    that  it  should  be  regulated 
as  taniy  and  cM'iallv  as  i>os.sibie.  without  the  necessitv  of  such 
inve^.ni;ation  ...t  ;.iu^vrt .  as  the  cu.stn,r-s  the  manners,'  the  pur- 
-s-;as  ..I  t!ie  peoj^ie  wouiu  rciiucr  odi...u.  and  ve.xatious.     That 
It  ,houId  exciude   those   -a ho   are   iea>C  able  to   contribute  or 
tunus;i  iHcan^   a  -diet  :    thai  it  shouid  distm-uish  the  i^rada- 
tioa   .A    aa«c>     that   ^t  >.i..u;d   admit  ...t   tho.e   abatements, 
wnico.  .u  parncu.ar  ,n>:,.:,ce>.  it  tni;,  u  be  pruJent  to  make  •'  ' 


.^:ii..v, 


<.iu 


''  ^i 


'.i.i.: 


la,!.    I,    ,;    ,,    ,c  .Aa.ci       .viiiL'i -.he  .•.nsui.iLT     a- <    n -he  -mr- 
■  =  •>    V.    r.    M»„„     i    la, -t.  i.pc.;    u  'hi-   'Sank,    mv  -iiuii    vho  'laj 
.„.-...      .        .  .  .„       ...  ...    ....     -    -^^     ■        'ftf/tvnj. 


I  hi     War   liuoutc    lax     i;^Sj'!6  63 

l\c  concci\c<\  th;.t  iho  "  Assossoii  Taxes  arc  ottcn  el„ded  bv 
mon  ol  l.iij;i-  itmportv,  \vlu>.  hy  tlonying  thcr.  selves  manv  of 
the  enjuynu'iits  i>f  lite,  ho.ird  up  ni,  nev  and  exclude  them- 
selves tioni  asM'ssmem.  '  '  Mut  Titt  vontcnded.  ncverthcie--^. 
that  "even  th.niuh  the  h  urds  oi  tht-  pcnuri.-i.5  elude  i,  „r 
seareh  ...  a  ihie  ptop.-itum  wo',  :,  at  le.i<t  in  s  r-.e  ca<.e«. 
be  tortheoMiin^;  at  the  Si>lieitation  oi  self-intcre*t  .^nd  se'.f- 
defense  "  ;  ^  anil  he  .lo.sed  by  a  general  a;  .cal  to  this,  par- 
tieiilar  elass  of  the  wea'thy  to  do  their  share.' 

On  the  seeoiul  n-ailini;  nt  the  bill,  a  j:eneral  d::.cuss:on  was 
precipitated,  .u\d  tierce  o  losition  developed,  led  V'.  F:x. 
Fitt  replieil  in  a  brilliant  speecii  of  DecemlKr  14.  ly*'-  i 
which  a  contemporary  observer.  Mallet  du  Pan,  said  :  "  Fr.  r.-; 
the  time  that  delihrrative  assemblies  have  existed.  I  doubt 
whether  any  man  ev -r  heard  a  displav  of  this  nature,  ecui  "v 
astonishing  for  its  extent,  its  precision,  and  the  talents  o:  :xs 
author.  It  is  not  a  sjvech  spoken  b\  the  minister:  it  is  a 
complete  course  of  public  economv;  a  work,  and  one  c:  the 
finest  works,  upon  practical  and  theoretical  finance,  that  ever 
distinguished  the  pen  of  a  philosopher  and  statesman  * 
Pitt  began  by  stating  that  it  had  been  called  a  tax  on  rr:p- 
erty  and  a  tax  on  income.     It  was  neither,  said   he.      Pit: 


"I  I  i.v  It  :i 


'    ihe  Sf'tfi.hi!  C'  !'if  A'i^'tt  //L'uurir.'t  Il'i,',' 
2d.  eii.,  I.»'niliin.  iSoS,  w\.  u,  p   353. 

1  ('A  .<.-..  I>.  354. 

'  "Then  sh.^ai  !  t!;.'se  who,  .lev.vtcl  t  <  avcamu.at;  n  !n-  -.g 
mcnt.  an  i  carU  ha! -.tv  .t  fruijal;;y,  1  avc  ar:*on  from  the  1  •*«: 
cuiploymcnt*,  by  ri^i  :  !'rui;.i!itv  anil  in'!et'at:i.'aMe  m  iu^try.  ■. 
an. I  enc.'urajje.l,  hy  th.it  h.ij'py  system  i!  i;  vtrnnien:.  ir.  i 
which  enable  1  thi'ni  anil  pcrnnti  anv  man  t  ■  emerge  !r  ir.  the 
if  satiety,  —  then  i>ut;ht  they,  I  say.  f  r  the  rec.!lc.t;>  n  ;' ;■  r 
rccci.'cd.  an^l  1'  r  th,'  sake  vi  thu^e  to  .ihuh  they  )  k  !  rwir  •.. 
selves  ab.ive  a!I  men  Ixiunil  to  cume  furwar  i.  in  .et'ense  : 
iffonle^l  cnciura^jenien'  •  •  th-ir  I.ih.^iir<.  nuru--  t  >  the--  i-  ■  . 
pursuits,  an  I  prntectiun  ■.  their  persuns,  their  priipcrty  ar.  !  '  : 
Of.  .</..  p.  355- 

* 'Juiite'l  in  .'i?  /  in,incia'  Suutn-ur  ,'/■/,-.  /.■'-^-.':* 
Hvv  VV.  !',  !;ii 'i-'j^r.  !.-n  !  :^  !'^-;.  •  ■'.  <■'-'-■  --•  ^ 
prup.i«e  !  the  Ineume  lax  ti  I'arl^ament,  that  g'tn  man,  :•  »»* 
ulea.  raiseil  h»  cloiiuence  I"  an  unu-ual  hcij^ht  an  i  p  *er.' 


rar.i  ar. : 

-■.e  . 
'.::  -^  r  ". 
^    ".  —  • 

••er.--.t-  ■ 

:■    ;   n-.  : 


rv  :- 


«  .  -:::i  i  ■  ^ri: 


I  \ 


6.| 


7//f  Intonif    Tax 


ilii  Liifil  ili.it  hi-  (lid  not  lii'licve  in  any  such  scheme.  "If 
till  aniKinil  III  i-voiy  \\\a\\\  |iit)|Krty  could  bo  ascertained,  it 
wiiiilil  Ik  a  lll.l^t  dcsiiahlo  thin^  ti>  make  the  people  contribute 
III  till-  |>iilili.  i\i^iiuc  III  pHiptirtion  to  their  wealth.  But 
iliiii-  i\i-,i(il  iiii  iiuaii.s  t»t  UMcrtaiiiiii^  the  projMjrty  of  indi- 
\iilii.iU,  i\n|.t  Muh  .ii  were  .>f  a  nature  that  could  not  be 
UMoitiil  t,i  lii>.tiMil.  then-lore,  ot  a  ta,\  upon  property,  this 
«.»>>  \\\\\\.  Ill'  hail  -,t.itoil  it  to  hi-. —  a  tax  upon  general 
I  \|'v  iiiliiuu'  '  loi  tlu-  asscs-scd  taxes,  he  t.-ijught,  were  the 
tvit  "siiiMi-  viitiuun"  ot  property. 

K\\  i!k  tSuul  KMilm^.  !\.v  maintained  that  the  bill  contem- 
I'l.iU-d  'xW  most  moMNttoiiN  inov|iialities  and  the  most  grf)ss 
iiiiuitKi.-  m  ^'vvis  p.iit,'  -a!ul  ^allvM  attention  to  the  protests 
vvhuh  h.ivi  h^v-ii  maik-  iti  sarious  public  mectin^;;*  in  London. 
•■  U  It  11..1  .1  dicadtu;  thmj;,  "  he  askeU.  "to  pa^s  a  bill  like 
'.hl^  a.;ai"-.t  nc  uiKiium^'us  opinion  ot  the  inhabitants  of  the 
'.lu-uoi'oiio  '  U  :i  It  In  the  ui!i.;ua4e  ot  this  money  bill '  '  We 
.;i\c  vouiiii'iv  Who  ^ivc"  voluntariiy.  -the  people  ot  the 
■iK-u.>-.o;w.  St  To  .,,^1,:  ;mv  tho  toarth  ot  i:  '  No  -they  have 
■jn.ciinioLiN.A  t'o..  a  cii  that  chcv  cannot  ^!ve  it  at  all!  that  if 
•.I  1.-.  .I'.u'i'!  •ivu  :,•  Lv  'cici-i  upon  them,  their  rusii  will  be  the 
^'^■^"•^  '!  't  ~  y-'x  -ciMcvi  in  a  '?ru;ia;i:  speech.  He  made  a 
,u>^s  li!)^   i;.;vi    -.o  :  V  -Mfof-iin    -t  t'v  ;'..:.::i:'\.  anj  in  cnn- 


ci;.-.;.-;) 

C\Cli'o.i 
I   !U       Ci 

iii.No.ciir 


;c>.i  iiN  •loirc'"'*  t'  "ia'te  ; 
'  r_  K'!  '.If  ■  '  " -"u^' o'lii  \. 
:  ■!>-■    ,".i:iL'  '.     ..'UCil    to    the 


i.IlI   ■  -vci  'V  I' 


;i. 


.■iicnv 


I 

•-.:  .      I..      .    ,  a. 'J.,     lii       I'.c..    '..  11     >    1,. 

>^    l.a.  .  . 

ilaL    .;  > 

.i'-     I,  V  il'.            >U--      '      >U._'J      (U.-   ;|ti;     .» 

'1..     .  c- 

"1   ■■ 

•-    .  I  ■    .  1  1  ■, 

I---       >    1.      1             IX..      ill, •.,%»!;. It      ij     l-. 

^S.'     u.  M.       • 

-■■ 

.-»•,-; 

•        1        t-    I-',     'V     I..,      Iiu*l.      11     :v.-rv      J,    1! 

-Mtvil^  il.ti 

'»;.. 

">u.     IK 

I'.^t.'!-.     .a:!    »4^    n    (H    laLiri.    iutu-- 

u,!t..r,   i...; 

u-. 

«iaii...    • 

X    .«     >.K'i    )■_    ii>t    m..,.ii,  ■■•, 

■iK..^.K    : 

'If 

'tlfcl         11!.. 

'■■    -I      ^'   "•,.   U       ■:;•  •  :      11      lla,           u.u     ; 

"t          ■!..■ 

.  t 

.       ■     -..--            t 

■•-     ■'•       •  ■.     ■  '..    1,    .,    :.vi. 

.V 

"          >  •>      ■  ".                     ■  .1.      U    1 

it.      ■:.. 

■J. 

■•■'■  a     ■ 

:---■    :-.           .-.1.     .         ..  _.u...,,,,i,     1.     ,.        j 

^-i  "  4'eat  and  unu.sual 
■-XT\.'t?>ive  precautions 
ruin^'us  projects  ot  dn 
H:s  JL'Dea'  did  not  tail 

1  'i:  'I'  4)^'U  '»ijuii! 
•  k  i.~  .1  •\,caiiiiurr. 
.■:.  V  [  i,ju[  .lavmtj 
II  .1  -icv^.  ')c  injhiv 
If'  '  ic  vM  :e«iiv  -1; 
■\>i  -u  Met' ;  )!,.  -)(! 
<-    ouilu.     —  ?iJC':',h 

e       >■■  ■        iVf/iii/i^    / 


'  "■II  » 


/'//«■    ll'iir  huomc    T.iv.    ;,"^V  ;>;'< 


6^ 


upon  (loaf  oars;  an«l  cvon  tlimmli  ilio  impopiiLiriiy  oi  :hc 
schoiiu-  w.tN  siii-li  that  lio  was  mohlv.i  on  hi>  jassa^'o  to 
St.  Paul'st,'  the  hill  was  cnactoii  int.»  law  on  lanij.m    i.',  !-.-*'<. 


The  Aid  ami  Contribution  Ait.  .i>    it  w  i< 
the  taxpayers  into  three  iatCi;oiies.      I:,   • 
comprised  the  j)resnnialilv  wealthier  t 
establishments    eonsistin^    of    e.iiri.ic 
horses,  and  who,  in  Pitt's  words,  p.ii^' 
lions  and    luxuries."  '     They  had 
previous  vear  aui^mcnted  as  IoIK.a 
ment  wa.>  /,"25,  it  was    inere.ise,'     '•  e».    ■    ik 
three  and  one-half  times;  if  X;-'. 
four  and  one-half  times;  and  if  c  e 
second   class   of   taxpayers   iiichuled    \\ 
keeping  any  such  establishments,  had  !v\ 
housv  ,   windows,  clocks,  or   watches      In    ., 
assessments  of  the  previous  year  were  altered 

^   '-' 1 


.  V  ere 
•  -ed 


>.  .t  -  0  - 
■  -'.lowi 


S-7i 

71-10 

lo-i-^ 


I  33-40 

-     Ovir  50     . 


The  third  class  comprise  .  the  ,.n.sumab;v  p."<rc>: 
viduals,  who  paid  only  on  lodj;iiit;s  ci  shop.-.  I..  ,h;, 
the  assessment  was  changed  as  follows  :  — 

•^^'' I'u 

5-/1      \ 

71-IO J  20-;,- 

"^'=i i  25-30 

Over  jO     . 


1 5-;o 


'  C'f.  the  "Sketch  nf  the  Ilistcn-'.f  the   i:n-'i:,h   In-  !v;j  T.i..        ...  .\, 

erts,  printe  1  at  the  end   (pf  "  Letter  fr.in  (..1  i\iin  Mr.iTh  !     !   hn  \  .  !  .  i  : 
in  Ihmktn'  M.if^.r.ine,  New  V.,rk,   iS'.i.,  |,.  S;j.     >i..e  aU-.   \\\:..x:\\  ^niar:. 

■:■■■".;:    .tr-.r.:::      ',-  .-7,-   .  .  ;     ,:\\;srr.    -.il-.m--.,    /T.    ,-,■■_     .        i.  n:     11.    I'jlu.   j-.     ;-. 

^  38  Gc.rtje  Ml,  c.  10.  '  i'r.ts  .-/,,-■.  i^-,  v,  1.  ii.  y. 

¥ 


I 

I  \ 
\\ 

K    :  - 


;i>. 


W        I 


i 


I 


66 


T/u:  Income  Tax 


It  is  clear,  therefore,  that,  although  called  a  triple  assess- 
ment, it  was  in  effect  a  system  of  taxation  which  was  gradu- 
ated from  a  slight  beginning  to  a  sum  equal  in  one  case  to 
double,  and  in  the  other  cases  to  five  times,  the  original 
Assessment.  Instead  of  being  termed  a  triple  assessment,  it 
i..iould  hence  have  been  called  the  double  and  quintuple 
assessment. 

The  characteristic  feature  of  the  scheme,  however,  was  to 
bring  the  assessments,  calculated  as  they  were  according  to 
expenditure,  into  some  relation  lo  income.  The  total  pay- 
ments were  so  arranged  that  incomes  under  £()0  were  ex- 
empt; incomes  from  ^60  to  jC 200  paid  from  one  one  hun- 
dred and  twentieth  to  one-tenth  of  the  respective  amounts,  i.e., 
five-sixths  of  one  per  cent  to  ten  per  cent;  while  all  incomes 
over  ;^2bo  paid  ten  per  cent."  In  other  words,  while  the 
normal  rate  of  tax  was  supposed  to  be  ten  per  cent,  the  rates 
were  progressively  reduced  on  all  incomes  below  X200, 
until  at  £(yo  no  tax  at  all  was  payable,  ^n  the  case  of  in- 
comes over  /,'200.  where  the  quintuple  assessment  fell  short 
of  reaching  ten  per  cent  of  the  income,  the  act  invited  the 
taxpayers  to  make  add-tional  voluntary  contributions,  thus 
realizing,  in  part  at  least,  the  scheme  of  Howies  referred  to 
above.2     Furthermore,  additional  abatements  were  made  in 

'  The  exact  ligures  were  as  fulli)\vs :  — 
On  incomes  from 

/6o-(>5  (he  tax  was  not  to  exceed  ,J„  of  the  incwne. 
65-70  the  tax  was  not  to  excee<l  (,",  of  the  income. 
70-75  the  tax  was  not  to  exceed  ."„  of  the  inc.jnc. 
75-So  the  tax  was  \vA  to  exceed  ^  of  the  irRdnie. 


and  so  on  to 


and  so  un  lo 


/ 100-105  '•"■  <a\  "as  iiol  to  exceed  ,',,  of  tlic  income. 
105-110  the  tax  was  n.t  to  exceeil  ,',  of  ihe  income. 
Ho-115  the  tax  was  not  t,i  excee.l  ,'j  of  the  income, 

.^  '50-'55  'h''  tax  was  n.^t  to  exceed  ,'„  of  the  income. 
155-160  Ihe  lax  was  not  to  exceed  ,',  of  the  income. 


and 


160-165  ''"^  '"^  "as  not  to  exceed 


of  th 


c  income, 


/  200  the  tax  Has  not  to  exceed 


uf  the  income. 


The    War  Income   Tax,  ijg8-iSi6 


67 


the  case  of  large  families.  Parents  of  four  to  seven,  eight  to 
nine,  and  ten  or  more,  children  could  claim  ten,  fifteen,  and 
twenty  per  cent  abatement,  respectively. 

The  triple  assessment  met  with  considerable  literary 
opposition,  even  while  the  bill  was  under  discussion.  One 
writer,  who  may  be  taken  as  the  type  of  its  opponents,  de- 
clared it  "fallacious  in  its  view,  destructive  in  its  progress, 
and  faulty  in  its  completion.  ...  It  is  not  ta.xation,  but 
a  species  of  extortion.  It  is  an  experiment  full  of  fear  and 
danger."  1  Considerable  prominence,  also,  was  given  to  a 
letter  of  the  celebrated  radical,  John  Home  Tooke,  who 
declared  that  "  this  hated  impost  was  odious  in  every  point 
of  view,"  and  who,  in  reply  to  a  notice  from  the  commis- 
sioners "that  they  have  reason  to  ai^prehend  your  income 
exceeds  sixty  pounds,"  and  that  they  "desire  that  you 
will  reconsider  your  declaration  of  income,"  responded  as 
follows:  — 

"Sir  :  I  have  much  more  reason  than  the  commissioners  can  have  to  be 
dissatisfied  with  tlie  smallncss  of  my  income.  1  have  never  yet  in  my  life 
disavowed,  or  hail  occasion  to  reconsidci.  any  declaration  which  1  have 
signed  with  my  uamo.  But  the  act  of  Parliament  has  removed  all  the 
decencies  which  used  to  prevail  arnonj^  f^entknien,  and  has  given  the  com- 
missioners (shrouded  under  the  signature  of  their  clerk)  a  right  by  law 
to  tell  me  that  they  have  re.ison  to  hciicve  that  I  am  a  li.ir.  They  have 
also  a  righ*  to  demand  from  me,  upon  oath  the  particular  circumstances  of 
my  private  situation.  In  obedience  to  the  law  I  am  ready  to  attend  upon 
this  degrading  (Hx.vion  as  novel  10  an  Englishman,  and  give  them  every 
explanation  which  they  may  Ije  pleased  to  require." - 

The  act,  however,  did  not  f.ul  to  iind  ardent  supporters. 
One  of  these,  who  tells  us  that  "never  before  did  any  measure 
meet  with  so  sudden,  so  violent,  and  so  general  an  opposition," 
wrote  a  work  "to  expostulate  with  my  Countrymen  on  the 
inconsiderate  haste  with  which  diey  have  suffered  themselves 

'  tit  A.Uiess  to  the  Ri^lit  //.'«.  ll'iHi.im  I'itt,  c,'. .,  on  :.,'iiit  /'.irts  of  his  .Id- 
piiiniitr.itii'ii :  Oioision.-J  H  his  frci^'..,!  ,1  th,-  /  n/;','  Ai.iiii  ill  in  the  I!ous{ 
of  i'ommoiis  ill  Xo-fmf;-r.  1;./-.     I.,in.l->n,  n.  <l.  [  i7i)S],  |i.  17. 

-'  Afriiii'ii'  0/  John  J/oi  lu  Tooif.  !!y  .\lf\nniltr  Sti|iht  n«.  V'nI.  ii,  p.  157. 
I.i'tl  Inn,  iSij. 


i 


I. 


•it 


< 


;;  1 


! 


I 

i 


68 


T/ie  Income  Tax 


to  condemn  and  oppose  the  measure."  '  He,  on  the  contrary, 
was  "disposed  to  believe  it  the  best  that  could  be  devised 
under  the  present  circumstances," *■'  holding  that  "a  direct  tax 
upon  property  would  have  met  with  a  still  more  strenuous 
opposition;  because  it  would  have  reiiuired  a  disclosure  of 
circumstances."'*  He  explained  that  " expenditure  is  taken  as 
the  criterion  of  ability,  and,  considering  how  few  there  are  in 
this  age  of  luxury  who  do  not  spend  as  much  as  they  can 
afford,  it  must  be  allowed  to  be  the  best  criterion  that  could 
be  discovered."*  A  doubt,  however,  overcame  him  in  the 
case  of  persons  "whose  economical  dispositions  keep  their 
expenses  far  below  the  limits  which  the  affluence  of  their 
circumstances  would  allow  them  to  observe."  Still  he  held 
that  "  such  persons  will  have  an  opportunity  afforded  them 
to  correct  this  disparity,  by  their  voluntary  contributions." 
He  therefore  concluded  that  this  |)l;in  '•  is  the  nearesit  possible 
mode  of  taxing  individuals  actording  to  their  nv//  income, 
without  obliging  them  to  disclose  what  that  income  is."* 

The  chief  defence,  however,  w.is  put  forth  by  the  Bishop  of 
I.undaff,  in  a  pamphlet  that  attracted  wide  attention.*^  "A 
new  system  of  finance,"  said  the  l^ishop,  "  has  this  year  been 
iiitroduceil ;  and  I  fairly  own  it  has  my  approbation  as  far  as 
it  goes.  It  has  given  great  discontent  to  many ;  but  it  has 
given  none  to  me.  On  the  Ciintrary,"  he  added,  "instead  of 
calling  for  a  tenth  of  a  man's  income  I  wisli  the  minister  had 
called  for  a  tenth,  or  such  ntiior  portion  of  overv  man's  whole 
property  as  would  have  eu.ihled  him  not  merely  to  make  a 
temporary  provision  tor  the  w;ir,  hut  to  haw  paid  off,  in  a 
few  years,   the  whole   or  the  greatest    [Mit  of    the   national 

1  An  .Iff  .u'  1.'  fh:-  II.  :.!  .:,!./  /I:,.f  ,  /  ,'■  -  -  ;  I/.„  .,„,/  U',.,:!,!  hi  f,>,'.-;C 
Unlfint,  irfr.fini^  />!,'  fi'i'  ■■  ifi  >i,J  It'i;  /;  /ir.rioii  ,:ii:  'h-  .'niftii'mut  'tf  Inime- 
iiialdy  <cmin;  I  r-.v.irj  :■  it-,    i'olunt.iry  iciitui  nti.)ii-..      \.,,\v\.,n,  1  7yS,  J.i.  jo. 

-  ('/.  .//..  1-.  2v  '  ('/.  ,,.'..  p    ;o. 

<  Of.  .It.,  y.   .'Q.  5   ().-.,  ,,/,  p.    ;,. 

«  f«  /./,.'■  ■,.  t,<  the  I'ei'fi-  ,"'  <;•■/•>/  /;<i!.iii:.  liy  K.  \Val^uil,  I.,,r,l  l;i>li.,p  nf 
I  atvl  itt.  l,..iiJ  .p.  I7'|S.  An  .thrr  i^ii!i.,ii  '.i.i^  j.u!.:i,li,  1  uiih  r  lli(_  tilli-  ..|  I  ii 
-■li'i'f.i  .'./  fhf  /',  :r,'r  ,'t  1,1, ,1/  /in: UK,  .-i.'-.?./,  i  />.',ii  i-u  lu.'i.f  ,y  i.an.i.iii  > 
l\v:t :.:.:.      I.i,   !-,  i-.,S. 


riL*?F 


V.-*'.-  m 


The   War  Income  Tax,  lygS-iStd 


69 


debt."  '  The  Bishop  loaned  toward  the  broad  principle  that 
the  national  debt  is  "  a  debt  belonging  to  every  individual,  in 
proportion  to  the  property  he  possesses,"  and  that  it  should 
hence  be  supported  by  equal  payments.  "^  The  ideal  scheme, 
in  his  opinion,  would  be  an  equal  property  tax.'  The  objec- 
tion, advanced  already  at  that  early  period,  to  taxing  the 
public  debt  in  the  shape  of  government  annuities,  is  met  by 
the  statement :  "  I  own  that  I  do  not  see  any  sufficient  reason 
why  property  in  the  funds  may  not  be  as  justly  as  any  other 
property  subject  to  the  disposal  of  the  legislature."*  The 
only  suggestion  tliat  he  made  "as  not  undeserving  of  atten- 
tion" is,  that  if  a  property  tax  be  imposed,  a  distinction 
should  be  drawn  between  the  owners  of  different  classes  of 
"permanent  income."  Permanent  income,  he  thought,  arises 
either  from  the  rent  of  land,  from  the  interest  of  money,  or 
from  annuities;  and  in  each  of  those  three  cases  the  same 
income  represents  a  varying  capital  value,  because  of  the 
different  years'  purchase  at  which  they  are  estimated.  "  Men 
under  these  different  descriptions  pay  equally,"  said  the 
Bishop,  "though  their  properties  are  unequal."''  Thus  is 
introduced  the  subject  of  what  later  on  came  to  be  called  the 
differentiation  of  taxation,  and  which  was  to  play  so  groat  a 
role  in  the  history  of  the  tax. 

The  Bishop's  address  led  to  a  wordy  warfare.  Wakefield 
replied  in  a  work  in  which  he  wavered  between  respect  for 

'  ./«  ./i//'Yi.(  to  /':,-  j',cf!e,  etc..  ]i.  I. 

'■^  "No  man,  ri-l.itivclv  speaking,  will  be  either  richer  or  poorer  Ipv  this  p.iy- 
ment  l)eing  j^enerally  nia'le,  for  rii  hes  anil  poverty  are  relative  icrni^;  ami  when 
ail  llie  in  ailurs  of  a  coi.iimiiutv  ar>'  proi'ortionahly  rolui'e'l,  the  relation  lietween 
the  iii'livliliiaU,  as  to  the  ./«.;>(/«"<  of  eich  man's  property,  reiiiaininy  un.TUer.  'I, 
the  indiviiluaU  themselves  will  feel  no  elevation  or  depression  ifi  tlie  scale  of 
Society."  —  (  M.  <//..  p.  2. 

"  "  1  coii«i.lrr  the  property  of  men  uiiite'l  in  society  so  far  to  lulong  to  the 
slate,  that  any  porti'm  of  it  may  he  justly  callei!  Lt  by  the  legislature,  f.ir  the 
promotii'n  of  the  common  ^ooil ;  anil  it  is  then  most  ei|uitalily  tallcl  lor,  when 
all  in'li\  I'iti.il-,  p.'sscssiiij;  pro(ierty  of  any  kr.i  ',  tontribulc  in  proportion  to  their 
possessions  "  —  //■(,/. 

*  !>/:  til.,  p.  .|. 


r 


I! 


70 


T/if  Income   Tax 


the  author  and  contempt  for  his  opinions.'  As  a  conse- 
quence of  the  violent  diatribes  of  the  author  against  the 
government,  the  pubhsher  was  indicted  for  libel,  and  a  re- 
joinder was  made  by  Ranby,  who  denounced  the  Reply  as 
"an  ill-written  and  inconclusive  composition."^  Another 
opponent  of  Landaff  stated  that  he  "  conceived  a  ta.x  upon 
expenditure,  or  upon  income  which  is  not  easily  separated 
from  expenditure,  to  be  wrong  in  principle."  ^  The  most 
severe  indictment  of  the  scheme,  however,  is  found  in  a  work 
by  the  Earl  of  Lauderdale.  Lauderdale  especially  opposed 
the  principle  that  "  the  assos-.-d  taxes  form  the  best  evidence 
of  property,  and  are,  of  lourse,  the  best  criterion  for  col- 
lecting an  aliquot  part  of  men's  estates."  On  the  con- 
trary, said  ^.auderdalc,  "  I  differ  so  far,  that  I  regard  it  as 
the  worst  of  all  the  numerous  means  of  forming  an  estimate 
of  property  that  has  at  various  times  been  suggested."* 
There  are  three  links  in  his  chain  of  reasoning.  First,  he 
denied  that  "  the  asses.sed  ta.ves  can  be  deemed  any  criterion 
of  real  expenditure."  .Secondly,  he  said,  "  Far  less  do  I 
conceive  it  possible  that  any  man  can  deem  expenditure  a 
criterion  of  income."  .\nd  thirdly,  "In  this  strange  chain 
of    reasoning,  .  .  .  there   is    no   step   more   ridiculous  than 

'"  I  protest  ...Umnly  uhen  I  oLserve  what  sirms  t.)  me  such  al.sohitc  igno- 
rance ,.f  the  state  ..f  v.cittv  in  this  ouintry.  an.i  such  uutragc.us  detianc-  ..f  the 
must  notorious  facts."-  •;  /IV/Zf  a.  ^pnu  pjrt-  of  thf  Huhof  .<(  laml.ifs  ./,/- 
J',-.^  to  the  r.ofU  ■/  C,,:,l  Hr.tain.  l!v  (.ilhcrl  WakclR-I,!.  2,1  e,l.,  London, 
1798,  pp.  i7-i,S. 

••'  //-/  /■x,tm,n,,lu.„of  Mr.  li;,i,fi,/.r .  K.pUlothf  Hni,..^  ■/  l.mdafT'  A.i./rnf 
liy  John  Ra,.l,y.  Lotulon.  1  "oS,  p.  ;.  |<a„l,v  si.lcl  wul,  Walvctuhl  in  onlv  onr 
point,  Ihat  of  tlic- t.),f,„|,ii,,|,  ,,f,.(„|,|ren       i /:  p.  ly. 

■'■'.\  tax  u|.on  cvp.-„,|,iurc  «ill  ,l,str,-ss  manv  in.hvi.luals.  who  must  pav.  !.ut 
know  not  how  to  save;  1,„,  the  (;re.-iter  part  w-ll  u-solve  not  lo  l.e  .listrcsse.i,  and 
wdl  avoi  I  ,1.  I,y  making  saunas  in  iheir  expenditure,  e.pial  I.,  their  taxes."  —  .7 
/■/,;//  /;,r  a;,,  ,„^  the  Sufpl,,-^  .;,„n,^'  the  ;/'„K.  humhh  ..uh,i,tl,U  to  tht  two 
Houses  0/  /'.nli.viunt,  Ihr  I nn.lf,!  ami  Mo,„.:i  l„tfr,-t,  aiu  /,.  „//  A,/-;^3  ,/«./ 
Comiilwm  of  th^  l-eo^U,  ,-.,p.:tle  rf  .unln/.utuif;  lo  Ihf  /■  v„„  ,  ,  of  the  St.ile. 
London,  179S,  p.  1 1 . 

••  A  I, tier  o„  the  present  Mea-ure,  of/ni.n,,.-.  .■«  re/,,.//  //;.  /U.'l  «„;,.  ,/,^v»./- 
I'K  >n  l\,r!,ament  u  part,,  uiariy  con^ulere.l.  liv  il,e  Karl  ot  Lauderdale,  l^n- 
don,  179S.  ji    2|. 


The   War  Income   Tax,  ijgS  i>>i6 


7' 


that  of  considering  income  as  a  criterion  of  capital."  '  I>a«- 
derdale  objected  to  ail  endeavors  to  ascertain  individ  <al 
property,  whether  directly  or  indirectly.  "To  your  inquiry 
whether  I  know  of  any  fairer  criterion,  I  reply,  that  though, 
undoubtedly,  I  know  of  many  better,  I  know  of  none  that 
are  good,  and  I  cannot  prevail  ui)(ni  myself  by  any  such 
suggestions  to  give  countenance  to  a  measure  which,  in  the 
opinion  of  our  most  eminent  masters  of  political  economy, 
never  can  with  propriety  be  adopted  in  a  free  country."  ■■* 
Lauderdale  objected  even  to  the  abatements  for  the  lower 
incomes,  on  the  ground  tliat  "  in  the  end,  the  lower  orders 
will  too  surely  discover  that,  though  ostensibly  exempted, 
they  will  be,  at  least,  common  .sufferers  with  others,  and 
probably  greater  sufferers  than  the  classes  whose  assessments 
are  augmented."^  He  characterized  the  law  as  "this  off- 
spring of  Robespicrre'.s,"  and  m.iintained  that  "  the  atrocity 
of  the  measure  is  in  every  view  unpreceilentcd."  * 

The  experiment  with  the  triple  a.ssessmcnt  did  not  justify 
the  hopes  of  its  distinguished  author.  Instead  of  the  four 
and  one-half  millions  that  had  been  counted  ujion,  it  yielded 
only  two  millions,''  owing,  as  I'itt  tells  us  m  his  budget 
si)eecli  of  the  next  year,  to  "  the  difficulties  which  the  measure 
encountered  from  the  shameful  evasion,  or  rather  the  scan- 
dalous frauds  by  which  its  effects  were  counteracted."*  On 
the  other  hand,  the  voluntat  contributions  amounted  to  two 
millions  instead  of  the  one  and  one-half  millions  that  had  been 
anticipated,  so  that,  in  Pitt's  words:  "the  meaimess  which 
shrunk  from  fair  and  equal  loiitribution,  has  been  compen- 
sated to  the  public  by  the  voluntary  exertions  of  patriotism."  ' 


'  i'/.  (-;/.,  i.|).  25-26. 

'  Of<.  ,it..  y.  ;,ii. 

*  In  all  tho  .ilfuial  i>-o.r,|s  thf  \iiM  ..f  tlu- 
muth  li'ucr  ihan  I'ilt  -  rii;:iri'»,  .V. .  ■•r^lint,'  lo 
yifld  was  onl,  /  1  S^r.i/X..  aiil  cwn  'liit  '.ciir 
See  /hit  A'ff'ort  fiW'i  t'.f  Stl,\i  ' '  ■innitre,'  •11  ih 


-  Ot>.  lit.,  \i.  29. 

*  ('/.  .;/.,  pp.  32- i?. 

iii.ile  .i>scs..nicnt  i-.  put  at  very 
!hr  re  "rd^  "f  the  Iri'asury,  the 
■^cnt^  "iilv  th'-  ;;•'■  "'S  assessment. 

'n,.  "!'•  .ni.i  /'r,'^*'eyt}    7'ii.x,  1852, 


1'.  ,;,  anl  h'ffvr!  of  the  ('.  m/w/>j/.  >Ii  i  i  ,>/  IniinJ  Kt.fnuf.  \S-o.  y.  120. 

"  Spreilif,  Mil.  ii,  p.  429. 

'  "  It'   I  ilhl  Ti.'t  rail  ulat'-  tht-  {\a^i'iii.  the  frau  i  an  i  ihi    ni  aii'U'^  \\hKh  ha\*. 
sttUK^Ie  i  t<i   lift  at  the  niitratiur.  .it  the  a-it  >.e'l '.aw..    .  an  i  1  nin'inn  it  with 


I 


I: 


S>1 


72 


Tlie  Income  Tax 


As  these  voluntary  contributions  could,  however,  not  be 
permanently  depended  upon,  Pitt  was  led  regretfully,  but 
none  the  less  firmly,  to  abandon  his  original  project,  and  to 
propose  a  new  tax  to  be  levied  directly  on  income  itself. 

§  3.   PitCs  Conversion  to  the  Income  Tax 

On  December  8,  1799,  Pitt  introduced  his  new  scheme  and 
touched  upon  the  general  principle  which  underlay  it.  "  It  is 
in  vain,"  he  tells  us,  "  to  disguise  that,  by  the  causes  to  which  I 
have  alluded,  the  full  advantage  of  the  principle  has  not  been 
obtained.  The  wishes  and  the  interest  of  individuals,  I  am  sure, 
must  unite  in  demanding  a  more  comprehensive,  a  more  equal, 
and  a  more  vigorous  application  of  a  principle,  the  rare  ad- 
vantag  s  of  which  we  have  been  able  to  ascertain,  if  we  have 
not  yc  aeen  so  fortunate  as  to  enjoy."  1  Originally,  we  are 
"  felt  it  materially  important  to  follow  some  durable, 
parent  and  sensible  criterion,  by  which  to  apportion 
T3."  But  now  it  had  become  necessary  "  to  prevent 
uds  which  an  imperfect  criterion  and  a  loose  facility 
-ation  have  introduced ;  to  repress  those  evasions  so 
111  to  the  country,  so  injurious  to  those  who  honourably 
their  qual  contribution,  and,  above  all,  so  detri- 
the  at  object  of  national  advantage  which  it  is 
to  i>  ote."  He  therefore  declared  it  to  be  his 
ti  )se   "that  the  presumption   founded  upon 

..\(.s  shall  be  laid  aside,  and  that  a  general  tax 
shall  be  ini  !d  upon  all  the  leading  branches  of  income." 
for  the  pu :,H)se  of  "obtaining,  by  an  efficient  and  compre- 
hensive tax  upon  real  ability,  every  advantage  which  flour- 
shame,  that  in  a  iiiuim  nt  like  the  present,  in  a  c.^ntfit  so  vitallv  interrstinR  to 
every  in.liii.lual  and  to  the-  iiati.ii,  ilierr  li,.v,-  Ih-.ii  men  baso  onou^ri,  to  avail 
Ihcniselvcs  uf  the  Komral  moiliiKali  iis  »hiih  w.-rc  intend.-,!  to  relieve  thos,-  who 
miglit  have  been  callcl  upon  to  coiitnlmte  In  yoii  I  their  m- ,\ns,  |o  ,iv„i,l  .Jiat  fait 
assessment  which  crresponlecl  mth  tlieir  ■  \'.  uinst.Kices,  1  :ini  liappv  t  •  lin.l  that 
the  honor  of  tlie  njlu.n  has  been  vimlicatc.l  by  the  nobic  and  generous  aid  of 
voluntary  contribution." 
'  Sj''ieilie\,  Vol.  ii,  p.  4J0. 


told.  ' 

S'  <n> 
t 
t 

o    mi 
('    ^ra 

:,ch 
ment; 

tenc! 

tent; 
the  as: 


The   War  Income  Tax,  ij(^8'iHi6 


73 


ishing  and  invigorating  resources  can  confer  upon  national 
efforts."  1 

The  project  of  a  direct  tax  on  all  incomes  was  novel. 
Very  shortly  after  the  passage  of  the  triple  assessment,  an 
anonymous  writer  suggested,  indeed,  a  "  general  contribu- 
tion upon  a  broad  basis."*  But  the  context  shows  that  he 
desired  it  to  be  restricted  to  the  landowners  and  fund- 
holders.^  In  the  same  way  Cooke,  in  his  so-called  income 
tax  scheme,  made  a  distinction  between  different  clas.ses  of 
revenue,  and  advocated  a  ta.K  only  on  "permanent  or  acquired 
property."^  It  was  reserved  for  Pitt,  however,  to  suggest 
that  all  incomes,  from  whatever  source  derived,  be  taxed,  and 
be  ta.xed  alike.  In  one  of  his  most  forceful  pas.sages,  we 
find  an  eloquent  defence  of  the  justice  of  taxing  the  income 
from  government  securities,  which  had  hitherto  been  exempt 
from  taxation.''  "  I  should  say  to  the  stockholders,  as  one 
of  the  public,  if  you  expect  from  the  state  the  protection 
which  is  common  to  us  all,  you  ought  also  to  make  the 
sacrifice  which  we  are  called  upoi^  to  make.     It  is  not  pecul- 

"  Speeches,  v..l.  ii,  i.|..  431-433. 

■■■  Consolatory  Thuu^hl^  on  Taxation  or  Contribution,  in  Three  Letters  to  a 
Member  of  the  Home  of  ConiiiioHS.  liy  the  author  nl  '/'/ioU/;htj  on  J  ajkatun  una 
a  new  System  of  Jiiniiing.     Limdon,  IjyS,  [).  y. 

'  Uf.  ,it.,  p.  6. 

*  "  Til  provi.le  for  the  exigencies  of  the  state,  without  laying  an  a-5»essment  on 
property,  uncertain,  fluctuating,  and  to  which  no  secure  income  to  the  poisetifir 
can  derive  ;  let  |>ri)perty,  ])ernianenl  or  ac^juirel,  and  which  produce*  a  certain 
income  to  the  possessor,  t)e  .inly  assesse<l." —  7>it  ,11  t  I'l^p'rli^m  -ulii.h  eiuh 
Class  of  the  /"<</<■,  Irom  the  f'eaiant  t:i  the  P.fr,  hre  in  t'l,  Suf'port  ,uul  /V,  • 
pertt^-  of  the  Stite.  Or  7'e'l  of  Ta.tath'n  :  ani  a  Sihe^iute  for  Asiesiiii,nt  x,n  In- 
come, resultim;  from  a  mathematical  lnvettf;ttion  0)  the  Vain-  of  I'roferty 
A.quircJ,  nn.l  lli.it  Fluctuating  in  7'raJe.  AiUreaeJ  t-  r,ery  InJi'i.luil  oj 
t'l.-  /Iritish  A«;/nv.  l!v  \.  (.'o.ike.  2I  ed.,  Lnmlon,  i;'**^,  ]'.  24.  *''."k':  "as 
willing  to  aild  lo  itw  t.i\  on  permanent  properly  a  tax  on  anriuities,  [Hn^ions.  sn  '• 
church  livings  p.  25'  :  hut  he  held  repeatedly  that  trade  .ind  ( .Jiiimercii!  in- 
come! must  he  exempt  1  p.  13). 

'■•  Slnrt-  the  time  ..fWilliair,  an!  Mary,  the  l...an  A  ts  ha  1  pr-'vi'  that 
goverriMient  annuities  should  h-  Ir.-.-  of  all  taxation.  1  he  Annual  Land  'la- 
Act,  wliiih  IM.  luded  '•  aiuiu  ties  p.iyaMc  out  of  the  puiilic  revenue,  exeniplel 
"annuities    .■!     \earl\    pa. menu    I-     lu.v    At    or     \i  I-    .1'    IVoilauient   sjHrcili.  al'N 


;-!npletl  from  the  payiiieiil  oi  ia\ 


aid. 


•  j>  ' . 


:eUi.  > 


74 


Tht  Income  Tax 


iur  to  ydii,  it  ilties  not  belong  to  the  quality  of  your  income, 
liut  it  i.s  made  general  aiul  reijuireil  from  all;  you  could  riot 
embark  y«»iir  capital  iu  any  other  species  of  security  in  which 
it  wouKI  not  be  subject  to  the  same  charge.  I  do  not  know 
what  objection  the  stockhohler  could  make  to  this  appeal."* 

On  the  Ihinl  reading  of  the  bill.  I'itt  took  up  in  considerable 
iletail  the  three  chief  objections  urged  against  the  scheme, 
heca use  I >t  the  givat  rdle  th.it  these  objections  played  in  after 
veai-s,  we  ma\  be  paidoneil  tor  explaining  Pitt's  replies  some- 
vsd.it  tiilly. 

Retelling  to  the  contei\tii>n  that  indirect  taxes  should  be 
putcned,  I'm  st.ited  th.it  such  au  increase  of  tax  on  cim- 
siiim>iK>i»  .IS  \vv>ukl  vicld  the  rcnuisite  amount  of  revenue  was 
nv>t  oi>!\  impi.utKMhte,  l)iit  wou'd  intriH.!uce  '"evils  ten  times 
ii>v«u-  >c\cie  than  those  which  are  imputed  to  this  measure."'' 
In  leplv  to  the  .second  objection,  namelv,  the  charge  of  in- 
>.luisito!i.kl  oroceduie.  I'ut  closed  his  ari;u!!ieyu  bv  putting  the 
..juestion  ••  iKvs  the  honour, ib'e  i;etule!ii.u:  really  think  that 
no  orwaution  v  h  itcver  ou^h:  to  be  taken  to  avoid  those 
sc.iiio.a^ous  c\.i>:ons  which  there  is  but  tixi  much  reason  \-i 
cx^vct  "MV  ',x-  -t'.tcntvteo. '■■ »  FitM'iv.  tuki:'.^  up  the  point 
that    tao    /.•.•.•o.-.e«.'.    >c  V""c    J.:d    not    discriminate    between 


the   va: 

kv.>    !v":..:n   oi    ::>c":-c   acC'.>; di'i^   to   their   nature   or 

duLUlO! 

t.  Vnr    -a-'M-v^i  t-a:  the  ;-v.;::.iht:es  complained  ot 

■  t!  Use  ■- 

".::  -.•:  : v  •m..:-c  ..t  -...vic:'..  -i:;.i  the  distribution  of  its 

'  .i-i'v,  a 

<-•.  '."le  .  av..-x  i:'o:-     r   ■•;*  i>;oiv:f. .    '     In  the  course 

o;  hi>   ; 

,'...:!».m:    ■•••:   ,t,'\  oceu  what  lat."-  o:;  became  known 

-IS    :hc 

•  ci^e-:  v-.t-  .■..'-■•..;  :-c;!!       t-c.'-%    ot    taxation.^ 

Kvtec. 

'..;  ■.'.'  v.vo  ■•>.'.'.,. ..!.>,    /.'c  ■.-.   v\  '    —  'cceives  his  in- 

C'.siie    :• 

■'•'•    ■^■'  '    I"'-'    -v    ■:--■•    ■'•■:-      ■.:;>--%.   Ft::  aske-i  ■ 

••W'i.i: 

v-''c>  '.  ■'e    'c^    '  iv   ,            \''.,»  t^.     !'  '"    -*ct  '-'^  '"jlarior*. 

:•.'  .Mv.  I 

.■.  vr     ■.-.v^c      A^'. '..•,    Avv     c  .TV  ■      Vv  :a\  ^r> 

aC'.s       lo 

•le*.     ;!c.,...i.  ;;■,        l"*'-      _.,<._■.■     .r     ::  _>::ce    rsoiain 

^.^    1      a»»    't\.^  ■ 


mam 


K    ' 

•-a 

X 

rt' 

'h 

-!><: 

al.  .. 

M 

.'U 

iC 

Oc 

'.V 

!    iaC ' 

•..* 

v  ', 

^.*    • 

.Hi 

'.  fi  ',1  _ 

Sf 

'., 

\  <; 

tf'  1 

ii-  r 

,  ■• 

f; 

<i 

^/■' 

!!. 

7V/<'   War  Intome    Tax.   i-;(^h  .'><j6  -jt, 

precisely  as  they  were.     To  complain  -f  This  i',»M.'^„. .    ,v 
to  complain  of  the  distribution  oi  ^ropertv  .  r.  i.  i ,  .. onipia.n 

of   the   consutution   of   society      To   atte-:,;  t   to  r-niedv   u 

would  be  to  follow  the  exampic  ■•?  tnat  du'.';.^-  r-iooi-:  of'i.:;,' 

islators  in  another  country.  .  .  .     T     tr  "^ 

two  species  oi  incomes   in    a    differ-.—. 

attempt  what  the  nature  of  s  .cictv  w.  .  : 

never  been  jiractised  in  the  tu;:rsc  <:'  f   . 

So  far  as  the  aileged  distincti-n  b-.-f.\  ■- 

come  from   rived    j>r,'}>ertv   iv   ,.  ,:._•:'■.■  ; 

permanent  estate,  which  is  re:  'cser.tr  :. 

as  it  were,  the  j^ropertv  of  a  ni^n  a::'--   ■ 

on  every  exigency  which  mav  o. .  _r     f  - 

and  industry  is  extintj'jishec  .  i:  c  :"• 

no  longer  the  pr.'pertv  of  tic  ^^-r.-.  •-.'- 

which  is  considered  as  the  s^-.e  •  r   :--' 

newed    demands.  '     This    rca>-'r:: 

thought  refined;  bin  the  ar.-\v..-r 

case  where  the  reason,  whv  f-^-cri 

more,  is  founJed  on  it?  s_;:.  ■_-,•:' 

to  the  tweeting  character  of  tr,e  ot 

passioned  ap;>eal  in  the  foii..-.vi 

objected  to  are  n<'>t  peculiar  f. 

our  socia]   >-t;.te  itself,  ar.d  '.'-■: 

cann.'C.  as   wc    .■.•i;ht   r;  t.  at"'-' 

presumptu^'us  ar.L-m-it  •...  dcra-.. 

would  terminate  i-i  ; ''..c  ...;:. i-   ■. 

ti<'n.  and  vith   a  'i-.-'i'_- •.-".•::.: 

ovenhr.'w  '  f  .iviLzcu  l::c     - 
A:tro-h  F;tt^  v.'..^„-:--   .,- 

The  ■        "   '  ' 


-Z.     P" 


i  '.C 


i-'  SI 


metro 
.".  ■- na 


C-vTTio: 

Ge-er^l 


>--■   r-.i.tr.. 


76 


Tlu  Incomt  Tax 


V 


K 


< 


indeed  nominally  approving  of  the  principle  of  the  bill,  and 
acknowledging  "  that  all  taxes  ought  to  be  equitable  and  pro 
portionably  levied  according  to  the  property  of  individuals," 
they  took  cxcc|)tion  not  only  to  the  measures  devised  tor 
carrying  the  principle  into  execution,'  but  stated  that  the 
proposition  to  tax  "the  precarious  and  fluctuating  income 
arising  from  the  labour  and  industry  of  iwrsons  in  trade, 
professions,  etc.,  in  the  same  proportion  as  the  permanent 
annual  income  proceeding  from  landed  and  funded  property, 
is  most  partial,  cruel,  and  oppressive." 

These  ideas  were  taken  up  by  Frcnil,  who  declared  him- 
self struck  by  the  "  palpable  injustice  "  of  Pitt's  scheme.* 
Frend  propounded  his  general  theory  that  "  taxation  is  equi- 
table, when  each  member  is  taxed  in  proportion  to  his  means 
of  paving  the  tax,"  '  explaining  the  principle  further  by  stating, 
very  much  as  Pitt  did,  that  "  taxation,  to  he  equitable,  must 
leave  the  subjects,  when  the  tax  is  taken  from  them,  precisely 
in  the  same  relative  .situation  to  each  other,  in  which  they 
were  the  moment  before  the  tax  was  paid."*  In  contradis- 
tinction to  Pitt's  contention,  however,  Frend  attempted  to 
show  by  elaborate  computations  that  the  sa  '  •  proportion  of 
taxable  means  takes  a  very  different  rate  of  taxation  rom  the 
various  categories  of  income  derived  from  proijerty."  He 
also  objected   to  the  "  peculiar  i)rogression  for  inferior  in- 


'  "That  the  taiil  Mil  prupo^M  to  cstaHlith  nn  ini|uisiti)rial  power  unknown  in 
tliisciiuntry  —  inccin»i>tinl  with  the  prim  iplis  yf  the  llritish  '  I'nslitulinn — and 
rcputjnant  tu  the  feelings  I'f  IJiKhsliniin."  —  The  retnlulinns  are  printed  "ti  p.  xv 
iif  the  h.iok  iif  Irenl  meiiliunel  in  the  next  n'lte. 

-  /'riiiii/i/es  :'/  / ,iMi/ioii.     liy  William  Kreml.     I^milim,  1 7(^0,  p.  iv. 

•'  0/1.  ,it.,  p.  2. 

♦  Op.  a/.,  p.  II. 

■'  "I'd  be  ei|uitalile,  the  subjeets  must  pay  in  prDpdrti'n  to  their  taxable  means, 
anl  these  me.ms  shouM  be  to  each  other, in  the  moments  befi'rc  ami  after  the  pay- 
ment of  the  tax,  in  the  same  relative  situation.  Ihey  eannot  U-  in  the  same  rela- 
tive situation,  unless  their  taxable  mi-ans  of  iniome,  productive  anil  unpr  duclive 
capital,  are  cliniiiushed  in  the  same  pr.>poition.  This  is  done  by  assi^fnin^  the 
value  of  productive  anl  unproductive  cnjiital,  and  takiti);  the  inc  nie  for  oi  vear  : 
ihi  11,  .iftrr  'lie  deiluition  from  the  whole  of  a  certain  sum,  a  certain  part  .'f  the 
rtin.iin  li  r  is  to  ))<•  t.iken  for  the  lav         ('/*.  1  il.,  p.  40, 


The   War  Inconu   Tax,  ij^^H  i,Si6 


77 


comes "  found  in  Pitt's  scheme,  and  compared  it  to  Paine's 
plan  of  graduated  taxation.' 

I'itt's  project,  however,  was  ably  supported  in  a  notable  ad- 
dress by  Lord  Auckland,  who  considered  that  the  bill  had 
been,  "  anxiously  calculated  and  ably  and  accurately  framed 
to  prevent  inequality,  fraud,  embarrassnient,  and  injury."' 
Auckland  addressed  himself  particularly  to  two  objections. 
It  was  claimed  in  the  first  place  that  the  system  of  abatements 
on  the  lower  incomes,  which  Auckland  accepted,  ought  logi- 
cally to  lead  to  what  he  called  the  "  principle  of  gradual 
rise  "  on  the  higher  incomes.  This  Auckland  denied,  main- 
taining that  progre.ssion  was  out  of  the  question  on  account 
of  its  '•  levelling  tendencies."  ^  The  other  objection  u  ,s  that 
incomes  like  those  derived  from  life  annuities,  which  were 
supposed  to  he  worth  only  ten  years'  purchase,  ought  not  to 
be  taxed  at  the  same  rate  as  incomes  from  estates  in  fee 
which  were  deemed  to  be  worth  thirty  years'  purcha.se.  Ac- 
cording to  Auckland,  h(jwever,  this  objection,  although  plau- 
sible, was  equally  unsound,  the  difficulty  arising,  in  his  opinion, 
entirely  "  from  a  confusion  in  terms,  and  from  blending  to- 
gether the  ideas  of  income  and  of  capital.  "  * 

'  "Tnm  Paine  and  Mr.  I'itt  .irc  more  ncirlv  unitctl  to  each  nthcr  in  their 
tinanci.ll  siheim-i.  th.in  either  vv..ul,l  l)e  willing  to  a.  km.wlc.lKt.  The  one  is  un- 
lusl  1.,  the  hi>;lur,  the  other  to  the  iniihlle  ibsso,  an.l  lioth  alTcet  an  equal  re- 
gard to  the  |x.or.  The  (.lie  w.uil.l  hrinj;  the  |.oor  ami  the  rich  to>;elher  l.v  level- 
linj;  the  riih;  the  other  m..u1.I  inerca«e  the  (hstance  hituecn  the  poor  an.l  the 
riih  by  .lemolishing  the  iiiiiHle  class.  The  one  injures  the  mill  by  impairing  the 
hea.l  of  water,  the  other  by  ileniolishins  the  cogs  in  the  smaller  wheels;  neilher 
the  one  nor  th.-  other  seems  to  have  takm  a  comprehensive  view  of  the  whole 
machine." — '•/.  <//.,  pp.  iv,  v. 

=  Vie  Su/',t,i>i,f  •>/'„  .y,r,*  mm/f  hy  rorJ.luil.ni.f  til  llie  Ihtnf  of  l\er!,  on 
Tueui.iy,  ihe  Sll,  J.iv  of  /.inuaiv,  ijqq,  ,„  thf  thirl  RraMn^  of  the  "  Hill  for 
Criinlhig  Cei l.iin  Duties  iifon  /iiconif."  —  I.omlon.  \-;<i'),  p.  H). 

'  C.ra  luation  '•  wouM  l)e  c  .ntrarv  to  all  the  safetv  an.l  rights  of  i.t..perty":  it 
would  "be  w.irthy  only  ..f  the  Irencli  Cmnril  of  Kjve  Uun.lre.l  ":  an.l  it  "w..ul<l 
am..unt  to  neither  more  n  i  le-s  than  the  intr.xluction  of  a  plan  f.if  equnlli/iiig 
fortunes;  an.l  to  the  inipli.-|  inference,  that  because  a  man  jios^e-ses  much,  th<  re- 
f..re  m..re  shall  l.c  taken  tr..m  him  than  is  prop.irti..nably  taken  fr.im  ..thers." 
—  O/".  ,»■/.,  p.  25. 

♦  ('/•  '"'•.  I'-  ^7. 


I 


p 

?* 


MICIOCOPV    MSOWTION    TfST   CHART 

(ANSI  and  ISO  TEST  CHART  No.  2) 


A  APPLIED  INA^GE     Inc 

^ST.  1653    Eost    Moin    Street 

Sr£  Rochester,    N«w    Yo'H         1*609        ilSA 

■jaS  (716)    482  -  0300  -  Phone 

5E  {7 '6)    288  -  ^989  -  To* 


78 


The  Income  Tax 


§  4.    The  Act  of  ijgg 

The  supporters  of  the  bill  finally  triumphed,  and  it  was 
enacted  into  law  on  January  9,  1799,  to  come  into  operation 
on  April  5.*  It  was  a  comprehensive  enactment  of  124 
sections,  covering  152  pages.  So  formidable  did  it  seem 
that  the  government  thought  it  wise  to  prepare  a  compen- 
dium in  order  to  make  it  intelligible  to  the  general  public* 
It  was  this  compendium  which  formed  the  subject  of  one  of 
Gillray's  caricatures,^  where  John  Bull  is  represented  at  his 
studies,  attended  by  his  guardian  angel  with  a  harp  in  hand, 
who  sings,  ^ 

"  Cease,  rude  Boreas,  blustering  railer ; 
Trust  thy  fortune's  care  to  me." 

The  tax  was  imposed  upon  all  residents  of  Great  Britain  in 
respect  of  their  entire  income,  irrespective  of  whether  this 
originated  in  Great  Britain  or  elsewhere,  and  also  on  all 
absentees,  —  i.e.,  British  subjects  not  resident  in  Great  Britain, 
—  in  respect  of  income  from  property  in  Great  Britain.  The 
rates,  exemptions,  and  general  abatements  remained  virtually 
the  same  as  in  the  triple  assessment  The  abatements  for 
children,  however,  were  altered  as  follows  :  — 

On  incomes  of  £60-400  the  abatement  for  each  child  was  5%. 
On  incomes  of  £400-1000  the  abatement  for  each  child  was  4%  when 
over  6,  3%  when  under  6. 


'  39  George  III,  c.  13.  "An  Act  to  Repeal  the  Duties  imposed  by  in  Act 
made  in  the  last  Session  of  Parliament  for  granting  an  Aid  and  Contribution  for 
the  prosecution  of  the  War;  and  to  make  more  effectual  Provision  for  the  like 
Purpose,  by  granting  certain  duties  upon  Income,  in  lieu  of  the  said  Duties." 

■*  .4  plain,  short,  and  tasy  Description  of  the  different  Clauses  of  the  Income 
Tax  so  as  to  render  it  familiar  to  the  meanest  Capacity.  London,  1799.  Vari- 
ous other  compendiums  were  issued,  under  private  auspices.  One  which  ran 
through  many  editions  was  entitled  :  Ta.xes  on  Income,  .i  Correct  Abridgement 
of  the  Act  imposing  a  Tax  on  all  Income,  containing  those  Clauses  which  princi- 
pally affect  Landlords,  Tenants,  etc.,  exhihited  in  a  clear  and  methodical  Manner, 
etc ,  witti  a  Schedule  for  estimating  the  Income  of  Persons  liable  to  he  Assessed, 
London,  n.  d.  [t7<»9].  The  most  elaborate  publication  was  the  one  mentioned 
in  the  second  note  below. 

■'  Dowcll,  The  History  of  Taxation  and  Taxes  in  England,  2d  ed.,  1888,  ii, 
p.  226. 


The  War  Income  Tax,  1798-1816  70 

On  incomes  of  £  1000-5000  the  abatement  for  each  child  was  3"/  when 

over  6,  2  %  when  under  6. 
On  incomes  over  £  5000  the  abatement  for  each  child  was  2%  when  over 

6,  I  %  when  under  6. 

Provision  was  also  made  for  the  deduction  of  premiums  paid 
for  life  msurance,  while  in  the  case  of  incomes  from  build- 
ings an  allowance  for  repairs  was  granted,  varying  from  three 
to  ten  per  cent,  according  to  their  nature.^ 

The  great  change,  however,  consisted  in  the  fact  that  the 
tax,  instead  of  being  calculated  according  to  expenditure,  was 
now  imposed  directly  upon  the  entire  income  of  the  individual. 
The  returns  were  required  to  be  made  under  four  heads,^ 
comprising  nineteen  so-called  cases,  of  which  the  first  fourteen 
were  included  under  head  I,  the  next  two  under  head  II,  the 
two  following  under  head  III,  and  the  last  under  head  IV.s 

The  reasons  for  the  impc.tant  change  from  expenditure  to 
income  as  the  test  of  taxable  ability  are  well  set  forth  in  the 
semi-official  publication  referred  to  above,  which  explains 
the  shortcomings  of  the  triple  assessment.  "  The  criterion 
taken  last  year,  as  the  means  of  ascertaining  income,  was 
expenditure,  as  evidenced  by  certain  articles  of  general  estab- 
lishment only,  and  was  even  then  admitted  to  be  in  many 
respects  imperfect.     It  was  fallacious,  inasmuch  as  it  included 

»  Three  per  cent  in  the  case  of  farm  buildings;  eight  per  cent  in  the  case  of  a 
farm  with  a  principal  messuage;  ten  per  cent  in  the  case  of  houses  and  buildincs 
not  occupied  with  a  farm. 
*  The  four  heads  were  :  — 
I.   Income  from  real  estate. 
II.   Income  from  personal  property  and  from  trades,  professions,  offices,  pen- 
sions, stipends,  employments,  and  vocations. 

III.  Income  arising  out  of  Great  IJritain. 

IV.  Income  not  falling  under  any  of  the  foregoing  rules. 

«  The  cases  are  printe.l  in  full  in  Ol^sfn'ations  i/c.  upon  the  Act  for  Taxing 
Imome;  in  which  the  Principle  and  Provisiom  of  the  Act  are  fullv  comiJereli 
with  a  Vie-u,  to  facilitate  the  Execution,  both  with  respect  to  Persons  chargeahtl. 
and  the  Officers  chosen  to  carry  it  into  Effect.  With  the  Act  at  large.  Together 
wuh  the  Substance  of  the  Clauses  of  the  .Assessed  Tax  .let  that  haze  a  Reference  to 
this,  and  a  copious  Index,  referring  both  to  the  Act  and  Observations.  London. 
1799.  220  pp.  A  reprint  of  the  cases  m.-iy  also  be  found  in  nnv.ll,  ,.«  ,//  iji' 
p.  96. 


8o 


Tlu  Income   Tax 


some,  and  wholly  excluded  others;  as  it  included  some  in 
different  proportions  to  their  respective  means;  andas  from 
the  nature  of  the  criterion  it  did  not  embrace  a  large  portion 
of  the  property  of  the  community  enjoyed  by  political  bodies 
or  persons  not  objects  of  those  assessments  which  constituted 
the  basis  of  that  contribution.  It  was  also  fallacious,  inasmuch 
as,  from  a  regard  to  antecedent  prejudices,  it  failed  to  enforce 
its  principle,  by  compelling  a  disclosure  of  income :  it  left  each 
individual  to  interpret  the  rules,  and  to  estimate  his  income, 
without  controul,  according  to  his  private  bias;  it  involved  the 
honest  and  loyal,  whilst  the  dishonest  or  disaffected  escaped 
under  their  own  interpretation."^  The  legislature,  we  are 
told,  was  aided  in  its  new  task  "  by  an  almost  universal  con- 
viction having  pervaded  the  public  mind  of  the  necessity  of 
meeting  the  exigencies  of  the  times  by  personal  taxation,  in 
proportion  to  the  means  of  the  individual;  and  by  a  similar 
determination  to  suffer  the  prejudice,  arising  from  the  appre- 
hension of  a  disclosure  of  circumstances  to  subside  in  favor 
of  an  effective  and  certain  mode  of  enforcing  the  just  principle 
of  equal  taxation."* 

The  administrative  machinery  of  the  act  is  worthy  of  par- 
ticular mention,  as  much  of  it  is  still  in  force  to-day.  The 
revenue  authorities  who  had  been  in  charge  of  the  assessed 
taxes,  and  who  were  then  known  as  the  Assessors  for  the 
Affairs  of  Taxes,  were  required  to  make  lists  of  the  Land  Tax 
Commissioners  Oi  each  locality,  and  to  appoint  a  day  of  meeting. 
The  Land  Tax  Commissioners  were  to  appoint  commissioners 
for  the  general  purposes  of  executing  the  income  tax  act,  who 
came  to  be  known  as  the  General  Commissioners.  In  the  City 
of  London  the  Mayor,  Aldermen,  and  Common  Council  were 
empowered  to  name  six  persons  from  whom  the  Mayor  and 
Aldermen  were  to  select  three  to  serve  as  Commissioners, 
while  others  were  to  be  chosen  by  the  Bank  of  England,  the 
Kast  India  Company,  the  Royal  P'xchange  Insurance  Com- 
pany, and  the  London  Insurance  Company.     Commissioners 

•  Ohur^'.-ttJr.Tf-  up---n  ihf  Art  f,-r  T'Jring  [-■}■■■"'!?      I  .•.n'1"n,  1799  f>p.  2,  3. 
«  Ihid.,  p.  3. 


The   War  Income   Tax,  ijg8-i8i6 


8i 


of  Appeal  were  to  be  appointed  by  the  Grand  Jurors  in  each 
locality,  with  similar  exceptions  for  the  City  of  London. 

The  General  Commissioners  were  to  appoint  and  summon  the 
assessors  or,  in  their  default,  the  justices  of  the  peace  were  to 
do  so,  and  these  assessors  were  to  serve  notice  on  every  house- 
holder to  send  in  lists  of  the  people  living  with  him.  The 
assessors  were  also  instructed  to  post  notices  of  assessment  on 
the  church  doors.  P>cry  person  chargeable  with  the  tax  was 
to  state  the  assessment  which  he  "  means  to  pay  as  being 
not  less  than  the  just  rate  or  proportion  of  his  income."  The 
assessors  were  to  make  up  the  lists  and  statements,  together 
with  their  own  comments,  and  then  return  them  to  the  clerks 
of  the  General  Commissioners,  who  were  to  hold  their  meetings 
within  a  period  of  from  fourteen  to  twenty-one  days. 

Thus  far  it  will  be  seen  that  the  entire  machinery  was 
virtually  in  the  hands  of  the  gentry  known  as  the  Land  Tax 
Commissioners  and  their  appointees.  Now,  however,  the 
central  government  interposed  with  its  officials  known  as 
surveyors  or  inspectors,  appointed  by  the  Crown.  These  had 
the  right  of  looking  at  the  assessment  lists,  of  suggesting 
revision,  and  of  making  preliminary  changes,  called  sur- 
charges. The  taxpayers,  also,  were  given  the  right  to  correct 
any  errors  in  their  statements.  If  the  General  Commissioners 
found  any  reason  to  question  the  returns  or  the  changes  made 
by  the  surveyors  or  inspectors,  they  were  empowered  to 
examine  the  taxpayer  or  anybody  else  who  had  knowledge  of 
the  facts.  The  questions,  however,  had  to  be  put  in  writing, 
and  no  taxpayer  was  compelled  to  answer  any  question, 
Morever,  the  provision  about  calling  in  outsiders  remained, 
and  has  remained  up  to  the  present  time,  a  dead  letter. 

The  General  Commissioners  then  fixed  the  a.ssessment, 
which  might,  however,  still  be  amended  by  the  surveyor,  and 
in  that  case  it  went  to  the  Commissioner^  of  Appeal.  Any 
taxpayer,  moreover,  might  appeal,  but  he  could  secure  no 
relief  on  appeal  unless  he  answered  the  questions  and 
volunteered  to  show  his  books.  A  refusal  to  make  any  lists 
at  all  was  visited  with  a  pcnuity  of  £,  2u.     The  tax  was  pay- 


82 


T/u  Income  Tax 


\  t 


able  in  six  annual  ilistalments,  and  the  assessments  were  made 
on  the  basis  of  annual  income,  except  that  in  the  case  of  in- 
comes from  professions,  either  the  year  closing,  or  the  average 
of  three  years,  might  be  taken.  Moreover,  traders  who  so 
pref'-rred  might  make  their  returns  to  so-called  Commercial 
Commissioners  in  the  locality,  rather  than  to  the  General 
Commissioners,  and  were  permitted  to  send  in  sealed  state- 
ments of  their  income.  These  Commercial  Commissioners 
were  in  each  place  two  in  number,  and  were  supposed  to 
be  experts  in  the  particular  matter.  Every  official  connected 
with  the  tax  was  pledged  to  secrecy. 

It  will  be  seen,  therefore,  that  from  the  very  outset  the  ad- 
ministrative machinery  of  the  income  tax  was  designed  to 
reduce  to  a  minimum  the  immixture  of  the  central  govern- 
ment and  the  danger  of  inquisitorial  procedure.  The  General 
Commissioners  and  the  assessors  were,  in  a  certain  sense,  rep- 
resentatives of  the  taxpayers,  and  might  naturally  be  sup- 
posed to  defend  their  legitimate  interests  against  the  treasury ; 
while  on  the  other  hand  the  necessary  degree  of  government 
control  was  represented  by  the  surveyors  and  inspectors  who 
were  responsible  to  the  central  government.  This  ingenious 
combination  of  local  representatives  and  of  government 
officials  is  found,  with  some  modifications,  in  the  present  in- 
come tax.* 


§  5.    T/ie  Public  Attitude  toward  the  Income  Tax 

The  passage  of  the  Income  Tax  Act  was  followed  by  a 
veritable  flood  of  pamphlets.     The  question  of  abatements 

'  The  act  was  amended  in  two  unimportant  particulars  in  May  and  July  of  the 
same  year,  by  39  George  HI,  c.  42,  and  39  George  III,  c.  49.  The  exact  points  may 
be  found  in  the  publication  entitled  Income.  The  Xnv  Schtdule,  as  Corrtcted  and 
Alleied by  the  Amended  Act  for  Taxing  Income.  Together  with  an  Abstract  of 
the  C/auu-i  of  the  Original  Act,  that  relate  to  the  tnode  of  Estimating  Income,  and 
a  Brief  .Xotice  of  the  Provisions  of  the  Amended  Act ;  -.fith  a  Variety  of  Examples 
cal.iil.ited  to  shew  the  Ahde  of  Estimating  the  different  Descriptions  of  Income, 
and  making  the  Deductions  according  to  the  Cases  in  the  Schedule.  London,  n.  d. 
[l7Wl  The  second  part  of  this  was  also  separately  published  under  the  till-: 
Obsey.uf.or.:.,  etr,  up.-r,  the  Amendid  Ad  far 


ig  Incsme.    London,  n.d.  [  1 7 


i'799j 


The   War  Income  Tax,  lygSiHid 


«3 


was  discussed  by  several  writers.  A  clergyman  by  the  name 
of  Beeke  praised  the  "  humane  and  benevolent  spirit  "  which 
suggested  them,  but  stated  that  he  entertained  considerable 
doubts  "  whether  in  their  present  form  they  have  not  created 
discontent  and  jealousy  of  one  another,  even  among  the  per- 
sons most  relieved  by  them ;  whether  they  apply  in  anything 
like  a  due  proportion  to  the  equitable  reasons  for  abatement ; 
and  whether  the  present  .  .  .  scale  ...  has  any  conveniences 
which  can  compensate  for  the  immense  diminution  of  the 
ta.\."  '  Rose,  on  the  other  hand,  defended  the  principle  on 
the  ground  of  its  "  proportioning  public  assessments  to  the 
ability  of  different  classes.  .  .  .  The  small  earnings  of  labo- 
rious industry  are  spared  altogether ;  the  progressive  rise  of 
the  tax  saves,  in  a  proportior.al  degree,  the  moderate  incomes 
of  the  classes  of  all  the  orders  below  competency  ;  and  the 
burden  of  children,  which  always  falls  heaviest  on  the  mid- 
dling ranks,  is  considered  in  an  abatement  of  the  contribution 
of  their  parents."  2  Rut  Rose  urged  that  great  care  should 
be  taken  not  to  allow  this  principle  to  degenerate  into  general 
progressive  taxation. ^  Other  writers,  like  Lauderdale,  op- 
posed the  income  tax  on  the  somewhat  inconsistent  grounds 
that  it  was  inherently  unequal,  that  it  would  discourage  in- 
dustry, and  that  it  would  be  shifted  from  the  tradesman  to 
his  customers  and  from  the  farmer  to  his  landlord.*     Lauder- 


1  Oherv,itiom  on  the  Proiiiuf  of  the  Income  Tax,  ami  on  its  Proportion  to  the 
whole  httoiiu  of  Cicit  [hil.iin:  inilnding  imporliinl  I'luts  reipiiiini;  the  F.xtent, 
IVealth  an,/  Population  of  this  A'iiif;tlom.  Part  the  lirst.  I!y  the  Kev.  H. 
Beeke.     I^iiniion,  1790,  p]>.  62-6;. 

-  .-/  Brief  Examination  into  the  Inerease  of'  the  A'er  eniie,  Co/nmeree  an,l 
Manufactures,  of  Croat  Britain,  from  lygj  to  lyc)*).  Hy  <!eorge  Ruse.  Lon- 
don, 1799,  p.  11  of  the  4th  ed. 

""It  shoulil  always  he  C()n5i<lere(I,  th.it  the  excessive  rise  of  a  progression 
of  this  sort  is,  in  effect,  an  arbitrary  IfvcUiiiK  of  situations;  and  that  an  inonli- 
nate  tax  on  the  wealthy  woulil  take  from  the  lower  classes,  whom  the  superHuity 
of  wealth  en  |iU>ys,  that  subsistence  and  comfort  which  are  bestowed  by  it.''  — 
Op.  (It.,  p.  ,^4. 

■*  Plan  for  altering  the  .Manner  of  ,olle,.'iiii:  •'  ^'"X^  /'"■'  'f  1''^  Public  Rev- 
enue, with  a  short  Statement  of  the  .tJranta^'es  to  he  JeriveJ  from  it.  By  Lord 
I.audcfdalc.      11.  p.,  n.  d.  [  1799],  pp.  57-6". 


84 


The  Income  Tax 


dale  suggested  in  its  stead  an  inheritance  tax.  Others,  again, 
called  attention  to  the  inquisitorial  nature  of  the  tax,  and  one 
ingenious  author,  under  the  nom  tie  plume  of  Hourglass, 
published  an  amusing  pamphlet  supposed  to  be  written  in 
the  year  2000,  in  which  he  recounted  the  exactions  of  the 
"merciless  mercenaries"  and  the  "brutes  at  the  head  of  ti.e 
inquisitional  band,  or  banditti,  with  all  the  rudeness  that 
insolence  and  self-important  ignorance  could  suggest,  either 
to  distress  the  feelings  of  the  indigent,  or  glut  the  bloated 
importance  of  a  jack  in  office,"  to  which  the  unhappy  citizens 
of  an  earlier  century  had  been  subject' 

The  most  comprehensive  discussions  of  the  act,  however, 
are  found  in  two  anonymous  publications  of  the  same  year. 
One  of  these  declared  that  not  only  consun^ption,  but  even 
property,  is  far  inferior  to  income  as  a  criterion  of  equality 
in  taxation.  It  would  always  be  difficult,  the  writer  thought,  to 
find  means  to  ascertain  the  value  of  prooerty,  and  furthermore, 
property.  "  may  be  possessed  without  being  productive ;  in 
which  state  it  could  not,  with  propriety,  be  assessed."  2  The 
best  criterion,  he  held,  is  that  of  "  clear  income,"  which,  he 
said,  was  the  principle  followed  by  the  assessors  of  the  local 
stent  in  Scotland.^  He  favored  official  valuation  rather  than 
self-assessment,  and  advocated  rigid  measures,  like  forfeiture, 
as  a  punishment  for  fraud.*  He  had,  however,  doubts  as  to 
the  wisdom  of  exemptions,  although  he  leaned  on  the  whole 
to  the  idea  of  making  a  discrimination  in  the  rates/'  In  the 
main,  he  was  optimistic  about  the  scheme,  and  concluded 
that  "  the  taxation  of  income  seems  not  only  to  possess  many 

'  The  Mome-Trap  M<ik(r  ,ind the  Income  lax:  a  Tale,  sufpoieJ,  by  Antici- 
palion,  tn  /'c-  z.'iitlen  in  l/iv  )',;> r  jooo ;  wU/i  an  Introdtulory  Allegory  addressed 
to  a  Man  in  Office.     Hy  Hum|)hrey  Houfglass.     London,  n.  d.  [1799],  p.  12. 

'-'  Three  F.ssays  on  Taxation  of  Income,  with  Kemarks  on  the  late  Ait  0/  Par- 
liament on  that  Sithject.  On  the  national  nt/tt ;  the  Public  funds;  on  the  prob- 
able Consequences  of  the  Law  for  the  .Sale  of  the  /.and  Tax  ;  and  on  the  Present 
.State  of  Ai^ricitlture  in  Crcat  liritaiii.  Il'itli  a  .Sclicme  for  tie  Improvement 
oj  every  Branch  of  it,  and  Remarks  on  the  Difference  betnveen  National  Produce 
and  Consumption.     Lonilon,  1791),  p.  53. 

8  Op.  cit.,  p.  51.  *  up.  cit.,  pp.  45,  55.  6  op.  at .  pp.  59,  61. 


77/ 


'c   War  Income  Tax,  lyi^S  i8i6 


85 


important  advanta-cs  over  every  other  plan  of  raising  money 
that  has  yet  been  proposed,  but  may  be  easily  carried  into 
effect,  without  the  risk  of  the  income  of  individuals  being  dis- 
closed, and  with  scarcely  a  possibility  of  its  being  evaded  "  1 
Another  warm  defender  of  the  act,  after  adverting  to  the 
shortcomings  of  expenditure  as  a  test  of  taxation,  considered 
that  a  "  tax  upon  all  capital  "was  "  absolutely  impracticable." » 
"  Under  these  circumstances,"  he  continued,  "a  tax  upon  all 
income  has  appeared  to  the  parliament  of  the  country  to  be 
the  most  equal  and  practicable  mode  of  raising  the  necessary 
supplies  :  that  it  is  practicable,  no  person  has  denied  ;  that  it 
is  equal,  has  indeed,  by  a  few  persons,  been  disputed."  ^   Our 
author  vigorously  denied  the  "injustice  of   ta.xing  different 
sorts  of   income  in  the  .same  proportion,  and   by  the   same 
rule,"  and  repeated  with  equal  vigor  the  contention  that  there 
ought  to  be  a  "  rising  scale  applied  to  incomes  of  different 
amounts."*     He  tells  us  that  "an  unfortunate  prejudice  pre- 
vailed in  the  country  against  anything  which  could  lead  to 
an  investigation  of  the  property  of  individuals  "  ;  but  he  adds 
that  not  only  "a  very  large  proportion  of  the  landed  proprie- 
tors," but  al.so  "  the  merchants  of  London,  Liverpool,  Nor- 
wich, Edinburgh,  Glasgow  and  Paisley,  have  come  forward 
earnestly  in  its  support.     That  which  in  former  times,"  he 
concludes,  "  would  have  been  thought  an  intolerable  calamity, 
is  now  considered  as  a  great  national  advantage." » 

After  the  first  flood  of  comment,  the  discussion  became 
less  vigorous.  A  few  writers,  indeed,  objected  to  the  injunc- 
tion of  secrecy  imposed  on  the  officials.      Thus   Rickman 

'  Op.  cit,  p.  55. 

■■'  A'amv  ,•/!),(  Ar^mtuts  aJi.uuedin  the  Ihmf  of  Commom  in  Support  of 
the  Bill  for  Granting  an  Aui  anJ  Conlrthution  for  the  J'rosecution  ofthi  War,  A,. 
imposing  eertain  Duties  upon  Income.     London,  1799,  p.  12. 

»  Op.  cit.,  p.  i;;. 

«  "The  object  of  thii  hill  is  net  to  regulate  incomos,  but  to  tax  them  ;  and  if 
you  take  from  different  incomes  the  same  proportion,  you  U-avc  them  of  course 
exactly  in  the  relative  state  in  which  you  Hnd  Ihciii."  He  .i^reed  with  Pitt  th.it 
any  other  prmciple  Would  be  "  destructive  of  all  idea  of  property."  —  Op.  cit.. 


iS. 


'  up.  ill.,  p.  28. 


86 


Tlie  Income   Tax 


,1' 


f  \ 


said,  "  I  do  not  see  why  the  exact  state  of  a  man's  pecuniary 
affairs  should  not  be  known,  as  well  as  the  colour  of  his  coat, 
or  the  complexion  of  his  countenance."'  Rickman  was  a 
warm  advocate  of  the  taxation  of  what  he  calls  swperflux,  or 
the  wealth  of  those  "who  acquire  improperly  great  property  ; 
who  have  infinitely  more  than  is  necessary  for  the  elegancies 
and  superfluities,  as  well  as  the  comforts,  of  life ;  who  wick- 
edly hoard,  or  wickedly  misapply  the  riches  they  have,  and 
who  make  their  exorbitant  wealth  the  constant  engine  of 
public  and  private  misery."*  In  the  same  way  Newbery, 
who  made  an  interesting  attempt  to  distinguish  sharply  be- 
tween capital  and  incorri',^  contended  that  the  oath  of  secrecy 
imposed  upon  the  officials  "might  have  answered  the  end  of 
quieting  alarm,  and  of  qualifying  the  apparent  harshness  of 
the  measure,  when  first  introduced  "  ;  but,  asks  he,  "  Is  it  not 
a  prudish  delicacy,  and  a  solecism  in  finance.'"  And  he 
adds:  "  Notoriety  is  the  antidote  to  subterfuge  and  evasion."* 
Other  more  prominent  writers  contented  themselves  with 
general  censure  or  promiscuous  praise.  Thus  Morgan,  in 
1801,  attacked  Pitt  for  continuing  the  tax,^  while  Wakefield 
declared  that  Morgan  was  entirely  wrong.  "  Our  opinions," 
said  Wakefield,  in  reply  to  Morgan,  "on  the  policy  of  that 
measure  and  of  its  effects  arc  directly  opposite.  He  singles 
it  out  as  an  object  for  censure,  while  I  feel  inclined  to  bring 

1  Mr.  Pilfs  Democracy  manije$t<il ;  in  a  Idler  to  him,  containing;  Praises  of, 
ami  Strictures  on,  the  Income  'Jar.  Hy  Thomas  Clio  Kickman.  i.Dnilun,  1800, 
pp.  9-10.  C/.  p.  28:  "It  would  be  well  if  every  inta  (jf  every  man's  income, 
whether  in  or  out  of  businiss,  tnulil  be  known.  If  it  could  be  ascertained,  what 
property  every  man  h.uli,  ami  how  he  (jets  and  applies  it  ;  it  would  be,  like  a  cor- 
rect chart  to  a  mariner,  a  guide  over  the  rocks,  and  through  the  mazes  of  so- 
ciety." i  /hi J.,  p.  12. 

'  '■  Capital  is  a  deposit  for  the  purpose  of  carrying  on  any  business  or  S]>ecu- 
lation;  income  is  the  emolument  which  arises  from  it.'' — CV-scnations  on  ,'Ae 
Jncome  Act;  farticuUuly  as  it  rel.ttes  to  the  Occupiers  of  land :  -uith  some 
Profosols  of  Amendment.  To  -.ohich  is  nd.ied  a  Short  Scheme  for  Afcliorating 
the  Condition  of  the  Luhourtng  .Man.     By  Krancis  Xev  i.ery.     London,  1801,  p.  I  j. 

*  Op.  cit.,  p.  35. 

5  ./  Comf-arative  Vie-.v  of  the  J'u'^.'ic  Finances,  from  the  Bei^innini;  to  the  CUse 
of  the  hue  Adm'.nislratij!:.     By '.Villi:::::  M^irgar,.     I.-.n-l-n,  I'-'oi,  p,  j6. 


The  IVar  Income  Tax,  179H  iHi6 


87 


it  forward  to  public  notice  as  an  object  for  praise,  as  a 
measure  l)()Iclly  conceivcil  and  happily  executed."  '  The  only 
writer  to  question  in  detail  the  merits  of  the  underlying  prin- 
ciple was  firay,  who  undertook  the  rather  arduous  task  of 
showing  that  "  the  profits  on  home  trade  and  all  mortgages, 
whether  i)rivate  or  public,  do  not  form  any  part  of  national 
income,"  and  that  they  thcrefon^  ought  to  be  exempted  from 
the  operation  of  the  law.' 

In  his  original  scheme  I'itt  had  calculated  the  total  taxable 
income  of  the  country  at  one  hundred  millions.  He  therefore 
expected  to  rcali/.c  the  sum  of  ton  millions  from  the  ten  per 
cent  tax.  Very  soon,  however,  it  was  seen  that  these  figures 
were  exce.ssi'o,  and  I'itt  accordingly  reduced  his  estimate  to 
seven  and  one-half  millions.  Hut  even  this  proved  too  high. 
The  tax  actually  yielded  in  1799  only  a  little  over  six  millions, 
producing  a  little  more  in  1800,  and  a  little  less  in  1801.' 
This  was,  however,  a  very  groat  improvement  over  the  less 
than  two  millions  produced  by  the  triple  assessment,  show- 
ing the  great  advantages  of  an  income  tax  over  an  expenditure 
tax. 

The  public  discontent  with  the  tax,  led  as  usual  by  the 
metropolis,  was  very  pronounced.  In  March,  1802,  shortly 
before  the  conclusion  of  peace,  the  City  of  London  submitted 
a  petition,  praying  for  the  repeal  of  the  tax  and  couched  in 
very  violent  terms.  The  press  and  public  meetings  all  over 
the  country  voiced  similar  sentiments,  and  when  hostilities 
came  to  an  end,  by  the  treaty  of  Amiens,  in  May,  1802, 
Addington  (later  Lord  Sidmouth),  who  had  succeeded  Pitt 


'  "  \or  shiiuld  it  lio  f  >r};nitin,"  he  .tIiU,  "thnt  it  was  appf'vc  !,  if  not  origi- 
nally suggestcil,  I'V  the  great  limly  nf  the  menhants,  bankers,  and  traders  of  the 
ca]Mtai  and  Liverpool."  —  .In  /nvtstigiilit^n  of  Mr.  Mor^iin's  Compiirnti-i  line 
of  the  Public  fhinnifS,fyom  the  lifi^inniit;^  to  thf  cli'se  of  the  late  .4Jmini:triilion. 
Hy  Daniel  Waketicld.  I^ondon,  i.Soi,  p.  24.  .■\s  to  this  last  statement  of  Wake- 
lieUI,  see  also  siifr,!,  p.  85. 

-  fhe  Imome  Titx  iiruliniziJ,  and  seme  Amendments  profaeJ  to  render  1/ 
more  Agreeable  to  ihe  British  CiHtlilution.     liy  John  (iray.     I,(jn  ion,  1802,  p.  23. 

'  The  exact  figures  of  the  annual  yield  will  lie  found  in  the  aftendix.inlra, 
p.  115. 


88 


Tfu  Income   Tax 


as  Chancellor  of  the  Kxche(|iier,  repealed  the  tax  as  unbefit- 
ting a  time  of  peace,  althouKh  he  was  compelled  to  make 
good  the  deficiency  in  the  revenue  by  new  excises  and  import 
duties,  as  well  as  by  an  increase  of  the  assessed  taxes.  In  his 
■  budget  speech  of  April  5,  1802.  he  was,  however,  warm  in  its 
praises,  stating  that  "it  was  to  the  wisdom  which  origmated 
the  tax,  and  the  firmness  which  induced  the  House  to  persist 
in  it,  that  the  country  was  indebted  for  the  comforts  we  now 
had."  '  As  soon  as  the  tax  was  abolished,  the  commission- 
ers decided  to  destro)  all  the  papers  in  their  possession,  —  a 
fact  which  Frend  thought  "  proves  that  honour  still  remains, 
and  may  it  ever  remain  in  the  brea  of  an  Knglishman."' 
Morgan,  writing  a  few  months  later,  could  not  refrain  from 
ejaculating  :  "  Happily  for  the  nation  this  odious  tax  has  been 
lately  repealed."''  But  Courtenay  was  more  just,  when  in  his 
reply  he  stated  that  "  the  income  tax  was  among  the  measures 
which  were  called  for  at  such  a  crisis,  by  an  able  and  un- 
daunted minister,  and  carried  into  execution  by  the  country, 
with  equal  spirit  and  good  sense."*  Courtenay,  however, 
praised  Addington  for  his  decision  "  to  leave  at  liberty  this 

'  }'arliamtHlary  llislory,  vol.  xxxvi,  p.  448. 

-  \Vc  arc  toll!  that  the  i)ai)er»  "  wer.-  carefully  tdllected  and  cut  into  piccei 
with  large  stationers'  shears,  then  thrown  into  large  bags,  and  ccmveycd  with  eijual 
care  to  a  paper  nianufactnry.  where,  under  the  inspection  nf  a  commissioner, 
they  '  re  committe.l  to  the  mash  tub :  and  he  did  nut  leave  them  till  they  were 
reduced  to  a  pulp."—  1  kf  Prindplt!.  of  J'anitwn  :  or  Contrihulion  iicorjing H 
Means:  in  wHi.h  it  is  s'u-.vn  tli.u  if  every  M„n  p,iy%  i„  rrflf.riioii  to  the  Stake 
he  h,u  in  the  Country,  the  />rfs,-iit  Ruinous  and  Of'l<ressire  Sy:,/,-'ii  0/  laxalion, 
the  Cu  lorn  llouu,  an,/  the  f-.-Keisv  OfKre  mav  he  ahoHsheil,  and  th,-  national  Debt 
Gra.iu,  l/y  an,/  Fasiiv  fait  of.  liy  Willi.im  Kren.l.  London,  1804,  p.  3.  The 
bo<Iy  of  this  book  ij,  with  a  few  omisfions,  the  same  as  Frend,  Principles  of 
Taxation,  1 799,  quoted  above  on  p.  76;  but  the  long  preface  of  thirty  pages  is 
entirely  different. 

»  A  SHpplemenI  to  a  ComparaHve  I'ieiv  of  tie  Public  Jinames,  containing  an 
Account  of  the  Management  of  the  Finances  to  the  present  Time.  Jly  William 
Morgan.     London,  iSuj,  p.  No. 

♦  Observations  upon  the  present  state  of  the  Finances  of  Great  Britain;  stig- 
gested  by  Mr.  Jiforgan's  .'Supplement  to  his  "  Comparative  lien,"  and  by  Mr. 
AddiHgton'i  Financial  Measures,  liy  Thomas  Peregrine  Courtenay.  London, 
1S03,  ,,.  5. 


>W^" 


?•'fflBK*l^^3Fiff^^!^•,r^t-1 


V 


The   War  Income   Tax,  ijgH  iSi6 


89 


Krcat  resource,  to  be  resorted  to  upon  any  future  enier- 
Kency."'  It  was  not  long  before  the  emergency  declared 
itself. 

§6.     T//f  .1/  of  i8nj 

In  1803  the  war  broke  out  anew,  and  Addinjcton  was  soon 
compelled  to  resort  to  tlie  old  device.  In  his  budget  speech 
of  June  13,  1803,  he  declared  his  intention  to  propose  "  a  tax 
upon  property,"  although  he  was  careful  to  add  :  "  I  wish  it 
to  be  distinctly  understood  that  I  consider  these  duties  as 
applicable  to  war  only,  and  I  intend  to  propose  that  they 
should  cease  within  six  months  after  the  restoration  of 
peace." ■•*  He  also  called  the  tax  one  "on  the  lands  and 
property,"  and  again  on  "rents  and  funds."  A  short  but 
important  debate  now  took  place  on  July  13- '4.  Addington 
had  propo.sed  to  make  the  abatements  below  jQi^o  applicable 
only  to  incomes  from  personal  labor,  but  Pitt,  who  was  now 
the  leader  of  the  opposition,  objected,  and  the  Chancellor 
finally  gave  way,  extending  the  reduction  to  all  classes.'* 
In  another  respect,  also,  Pitt  was  successful.  Addington  had 
originally  embodied  his  scheme  in  two  bills,  one  of  which 
dealt  with  the  '.ncome  from  the  funds,  or  government  securi- 
ties. Pitt  objected  to  this  dismemberment  of  the  tax,  and 
Addington  was  compelled  to  recast  the  measure  and  to 
present  it  in  a  single  bill.  The  attempt  of  the  opposition, 
however,  to  exempt  the  income  from  the  public  funds  did  not 
prevail  although,  as  we  shall  see,  the  foreign  holdois  of  gov- 
ernment securities  were  not  made  liable  to  the  t  ix.  To  the 
objections  raised  by  the  opponents  on  account  of  the  lack  of 
discrimination,  Addington  replied  that  "equality  of  taxation 
was  a  thing  not  to  be  brought  about  by  human  wisdom."*   The 

'  Obser;  itliom  upon  the  protnt  lalf  I'f  the  Fituineei  ol'  (irei)t  lirtlatn  !U,- 
gtstej  hv  Mr.  .)/orf(in'!  SupfilemenI  lo  Ins  "  Compitraliie  I'le-.r,"  anJ  !■;■  M>. 
Addington' s  finiinii,il  Measurt!.  l>y  1  homa»  I'cregrine  (Jourtenay.  Ixndon, 
1803.  p.  5. 

-  I'arhamenlary  History,  vol.  ,  ixvi,  p.  1596. 

'  Op.  <it.,  Sesstim  of  1S02,  iii,  pp.  74,),  749. 

*  Op.  ill.,  vol.  xxxvi,  p.  1662. 


i?^^^^?fi!=?5^x^$^'^^H!:*^x^'^r- 


90 


The  Income  Tax 


I:' 


bill  as  amended  became  law  on  August  1 1,  1803,  under  the  sig- 
nificant title  of  "  An  Act  for  Granting  to  his  Majesty  until 
the  sixth  day  of  May  next  after  the  ratification  of  a  definitive 
treaty  of  peace,  a  contribution  of  the  profits  arising  from 
property,  professions,  trades  and  offices."  ^ 

The  law  of  1803  introduced  a  fundamental  change  in  the 
method   of   assessment.     As   this   new  method   is   virtually 
identical  with  the  one  followed  at  the  present  time,  it  deserves 
a  somewhat  more  elaborate  descriptioi..     The  alteration  con- 
sisted in  the  fact  that  the  taxpayer  was  no  longer  assessed 
directly  on  his  total  income  regarded  as  a  lump  sum,  but  that 
his  income  was  now  divided  into  a  convenient   number   of 
categories  or  schedules,  and  that  in  each  schedule  the  tax  viz 
imposed  as  far  as  possible  upon  the  source  of  the  income ; 
that  is,  upon  the  person  who  paid  the  sum  which  became  the 
income  of  the  party  in  question.     In  other  words,  the  tax  was 
stopped  at   the  source.     Thus  the  tax  on  the  owner  of  th. 
land  or  of  the  house  was  paid  by  the  tenant,  who  deducted  it 
from  the  rent ;  the  tax  on  persons  in  the  employ  of  the  gov- 
ernment or  of  public  corporations  was  paid  by  the  latter,  and 
was  deducted  from  the  amounts  payable.     The  exact  nature 
of  the  alteration  and  the  reasons  why  the  change  was  made 
are  set  forth  in  an  interesting  publication  which  was  issued 
under  official  auspices.^     The  old  income  ta.x,  we  are  told, 
"  called  upon  the  ultimate  proprietor  to  account  for  that  por- 
tion of  his  property,  from  all  and  whatever  sources  it  was  ie- 
rived."  ^     Unfortunately,  however,  as  we  are  told,  this  method 

1  43  George  III,  122. 

■'■  An  Exposition  of  the  Ad  for  a  Contribution  on  fruptrtv.  Professions,  Trades, 
and  Offices:  in  which  the  Prin.iples  „nd  I'rorisions  of' the  A.t  „re  fully  con- 
siJered,  with  a  Fiexu  to  fialilate  its  Ex,;ution,  both  wilh  re.f.vt  to  Persons  char!;e. 
ahU,  as  Persons  liable,  to  the  Tax  by  way  of  Deduction,  and  the  Offi.ers  chosen  to 
carry  it  into  Pffect.      l.oniion,  1803. 

3  'Comprt-hen.ling  all,  without  distinguishing  any  of  the  sources,  it  lai.l  an 
equal  contribution  on  the  mass  of  annual  ac<)uiremcnt.  .  .  It  inv,.lve-l  the 
whole,  however  intricate  .,r  eNtcnsivr,  in  „ne  .ice ant,  to  1,0  furnishc.l  by  the 
party.  The  pro.luce  of  trade  and  commercial  adventures,  the  laborious  and  in- 
dustrious avocations,  was  mixed  with  the  produce  of  property,  re^iuiring  neither 
the  skill  nor  imlustry  of  the  proprietor  to  attain  or  pres.-rvo.      It  was  imssost-d.  mit 


!ssisxsaia:^mr,:  "i^vsK. . 


u 


t    . 

4 


The   War  Income  Tax,  1798-1S16 


91 


did  not  work  successfully.     "It  has  so  happened  that  this 
wise  and  judicious  measure,  in  its  operation  on  the  interest  of 
individuals,  was  found  to  depend  too  much  on  the  imperfec- 
tion of  human  nature.     It  became  unequal  in  the  execution, 
and  thereby  defeated  its  own  principle."     In  order  to  obviate 
these  difficulties,  and  "  to  preserve  and  protect  the  principle 
of  equality,"  the  new  method  was  devised.     "As  the  former 
was  imposed  on  the  general  account  of  income  derived  from 
all  the  sources ;  the  present  duty  is  imposed  on  each  source 
by  itself,  in  the  hand  of  the  first  possessor,  at  the  same  time 
permitting  and  authorizing  its  diffusion  through  every  natural 
channel  in  its  course  to  the  hand  of  the  ultimate  proprietor. 
The  present  measure,  then,  must  be  considered  as  a  tax  on 
the  first  produce,  gradually  subsiding  itself  into  a  tax  upon 
the  income  of  the  ultimate  proprietor;    affecting  in  its  im- 
mediate object  the   hand   that  acquires,   but  extending  by 
direct   motion   to  the   hand  which   converts  the   income   so 
acquired.  ...     By  these  means  its  object  is  attained  with 
more  facility  and  certainty,  and  with  less  intricacy  and  dis- 
closure, diminishing  the  occasions  of  evasion  by  the  means  of 
execution." ' 

After  explaining  more  in  detail  the  operations  of  this 
principle  of  stoppage  at  source,  the  exposition  concludes: 
"  Thus  the  charge  is  gradually  diffused  from  the  first  posses- 
sor to  the  ultimate  proprietor;  and  one  of  the  greatest  causes 
of  defalcation,  arising  from  the  necessity  of  protecting  private 
transactions  from  exposure,  experienced  under  the  Income 
Act,  is  avoided  ;  at  the  same  time  protecting  the  private  trans- 
actions of  life  from  the  public  eye,  whilst  the  revenue  is  more 
effectually  guarded."* 

In  order  to  distinguish  the  new  tax  as  much  as  possible  from 
its  predecessor,  another  name  was  given  to  it.  Addington, 
as  we  have  seen,  called  it  in  turn  a  tax  upon  property,  a  tax 
on  land  and  property,  or  a  tax  on  rents  and  funds.     The  law 

on  its  first  acquirement,  but  after  its  separation  into  all  the  channels  to  which  it 
was  destined,  on  the  ultimate  possessor."  —  Op.  Ht.,  p.  2. 
'  Op-  ''''•'  I'l'-  3.  4-  -  Op.  ctl.,  p.  5. 


SriSUKte*  ^ajX^WT^DKil^ii: 


S^^^ASS^''Z^.^f-.'SSSM^SS!IPllKSiJ!li/-jf  '.^/K^X^'':ra*St}^U\  J  .I.IJ1.HI  h,  i^ 


92 


The  Income  Tax 


\i\ 


U. 


i 


itself  called  it  a  "contribution  of  the  profits  arising  from 
property,  professions,  trades  and  offices  "  ;  *  while  the  official 
exposition  called  it  a  "tax  on  property  and  productive  in- 
dustry," contrasting  it  continually  with  the  old  "  income  tax." 
Others  called  it  a  tax  on  produce.  Courtenay,  who  discussed 
the  subject  at  some  length  after  the  enactment  of  the  law, 
took  exception  to  all  these  clumsy  attempts  at  a  new  nomen- 
clature. "  If  I  may  be  allowed  I  will  call  it  a  tax  upon  income. 
Ministers  have  shewn  a  very  unworthy  desire  that  this  tax 
should  not  be  so  called,  but  they  have  not  yet  hit  upon  any 
other  name  which  can  be  properly  applied  to  it."  ^  The  criti- 
cism of  Courtenay,  however,  shows  that  he  did  not  appreciate 
the  real  character  of  the  change. 

As  a  matter  of  fact,  the  law  really  provided  for  a  series  of 
taxes  rather  than  for  a  single  income  tax.  As  the  official  ex- 
position correctly  puts  it :  "  The  act  comprehends  four  dif- 
ferent sources  of  profit,  applicable  to  four  principal  classes  of 
individuals,  under  different  modes  of  taxation,  each  of  which 
must  receive  a  distinct  consideration,  as  if  they  had  formed  the 
subject  of  four  distinct  acts  of  Parliament."'*  These  were 
landed  property,  funded  property,  produce  of  industry,  and 
offices  held  under  government.  "Landed  property"  was 
reached  in  two  ways,  by  what  was  knowr  respectively  as  the 
"landlord's  duty"  and  the  "tenant's  duty."  The  landlord's 
duty  was  dealt  with  in  Schedule  A.  It  was  levied  on  the 
annual  value  of  all  lands,  tenements,  and  hereditaments,  that 
is,  the  rack  rent,  less  certain  deductions  for  repairs  (not  to 
exceed  two  per  cent  of  the  rent  for  farm-houses,  or  five 

'  The  law  of  1S03,  like  that  in  force  at  present,  speaks  in  several  places  of 
"proiits  anil  gains."  Ihcse  wonli  have  rcpcateilly  heen  held  to  be  synonymous 
and  to  signify  income .  "  rrotlts  "  thus  incl  jde  "  interest,"  from  which  they  are 
to  he  distinguished  in  both  the  popular  and  the  strict  economic  sense. 

-  "  I  must  allow,"  he  adds,  "  that  his  Majesty't  ministers  took  all  the  pains  they 
•  could  to  ilepart  from  the  principle  of  such  ■  tax,  so  as  to  get  rid  of  the  odium 
supposed  to  attach  to  the  name  .  .  .  Unfortunately  they  abandoned  one  prin- 
ciple, before  they  had  adopted  another  in  its  room."  —  Courtenay,  Observations, 
p.  61.     For  full  title,  see  supra,  p.  89. 

°  An  J.ApvxIiun  iij  iiic  .hi,  etc.,  p.  5. 


The  War  Income  Tax,  1798-1816  93 

per  cent  for  other  buildings),  for  land  taxes,  and  for  sewers, 
fencing,  embankment,  and  drainage  rates.  A  few  cases  of 
property  of  a  soKralled  "  uncertain  annual  value,"  like  mines, 
when  carried  on  as  a  trade  by  the  owner  or  a  lessee,  were  to 
be  assessed,  as  will  be  seen  below,  in  Schedule  D.  These 
subsequently  came  to  be  called  "concerns  about  lands," 
or  "concerns  arising  out  of  land." 

Schedule  B  dealt  with  the  tenant's  duty.  It  applied  to  the 
same  property  as  Schedule  A,  except  that  dwelling-houses 
from  which  the  tenant  expected  no  income  were  chargeable 
only  when  they  were  connected  with  farms.  VVnereas,  how- 
ever, the  duty  in  Schedule  A  was  at  the  normal  rate  of  five 
per  cent  {is.  in  the  £\  the  rate  in  Sci.edule  B  was  ()d.  in 
England,  and  6d.  in  Scotland.  Furthermore,  one-eighth  was 
deducted  for  all  tithe-free  lands.  The  tenant's  duty  was  based 
on  the  theory  that  the  tenant,  after  paying  his  rent,  his  ex- 
penses of  cultivation,  and  his  local  taxes,  would  ordinarily 
acquire  for  his  own  purposes  a  sum  equal  to  three-fourths  of 
the  rack  rent.  Since,  however,  the  local  rates  in  Scotland 
were  paid  by  the  landowner  instead  of  by  the  occupier,  as  in 
England,  the  net  profits  of  the  Scotch  tenant  were  fixed  at  a 
sum  equal  to  only  one-half  of  the  rent.  These  figures  were 
selected  as  affording  an  approximate  standard  of  accuracy  ; 
but,  as  the  exposition  tells  us,  the  taxes,  in  this  way,  "approx- 
imate to  that  equality  which  is  so  desirable  without  the  in- 
i.icacy  of  a  complicated  account,  which  under  the  income  tax 
was  found  so  difficult  in  the  execution."'  The  endeavor  to 
ascertain  the  exact  income  by  the  method  prescribed  in  the 
original  law  of  1799  had  led  to  such  gross  evasions  and  such 
glaring  e\nls  that  it  became  necessary  to  substitute  a  new 
method,  and  "the  certainty,  the  convenience  and  the  favour- 
able result  to  the  party,  must  be  taken  to  be  the  principle  of 
the  alteration,  and  must  be  set  against  the  defects  which  may 
appear  in  the  inaccuracy,  whatever  that  may  be."^  As  we 
are  told  in  another  passage  :  "  A  criterion  is  admitted  by  all 
to  be  necessary,  where  it  is  impossible  to  arrive  at  the  actual 

"  Opal.,  p.  13.  -i  Op.  at.,  p.  14. 


94 


The  Income   Tax 


profits.  Whatever  criterion  is  fixed  must  necessarily  intro- 
duce some  inequality  :  the  most  simple  is  the  most  convenient ; 
the  most  general  is  the  easiest  to  be  understood  and  pursued. 
The  simplicity  and  convenience  will  be  admitted  in  its 
favour."  ^ 

As  opposed  to  "  landed  property,"  "  funded  property  "  was 
taxable  in  Schedule  C,  which  applied  to  all  "  profits  arising 
from  annuities,  dividends*  and  shares  of  annuities  "  payable 
out  of  any  public  revenue.  The  Bank  of  England,  the  South 
Sea  Company,  and  the  Exchequer,  to  whom  the  payment  of 
such  dividends  was  intrusted,  were  required  to  furnish  an 
annual  account,  although  the  tax  itself  was  to  be  paid  by  the 
stockh-^l^ers  or  their  agents.  This  provision,  as  well  as  the 
similar  one  that  foreigners  not  residing  in  England  should  be 
exempted  from  this  part  of  the  tax,  was  due  to  the  suggestion 
of  Pitt,  in  order  that  the  tax  might  not  be  interpreted  as  con- 
travening the  guaranteed  exemption  of  government  securities 
from  taxation. 

Passing  over  for  a  moment  Schedule  D,  we  come  to  Sched- 
ule E,  which  comprised  income  from  public  office  or  employ- 
ment of  profit,  and  from  salaries,  annuities,  pensions,  or 
stipends  payable  by  the  Crown  or  out  of  the  public  reve- 
nue. A  wide  interpretation  was  given  to  the  term  "  public 
oflfice  or  employment"  so  that  it  was  made  to  include  the 
income  from  any  corporation,  company  or  society,  and  from 
any  institution  under  a  public  foundation.  Here,  again,  as  in 
Schedules  A  and  B,  the  tax  was  assessed  to  those  who  paid 
the  income,  and  who  thereupon  deducted  it  from  the  sums 
receivable  V-  ;  e  entitled  to  the  income.  As  the  law  puts 
it :  "  The  duu>  nal!  be  detained  or  stopped  and  deducted  out 
of  the  sums  in  respect  whereof  they  shall  be  charged."  "     The 

'  Op.  at.,  p.  17. 

'■"The  term  "  diviiiends"  is  u<:eil  in  a  technical  sense.  In  1752  the  "consols" 
were  createil,  i.e.,  certain  bank  annuities  f<,r  which  the  ^overnineiit  was  responsible 
were  "consoli.lated  intu  (me  joint  stock  of  annuities,"  ami  were  jiayable  in  half- 
yearly  .//fiVfWt.  "  l)ivi(!enils"  thus  meant  these  shares  of  annuities.  It  gradu- 
ally came  to  me.in  interest  in  general  on  moneys  invested  in  the  goveriitnent  fund 
cr  securities.  "Sec.  Iy2. 


The   War  Income  Tax,  iyg8-i8i6 


95 


management  of  this  schedule  was  entrusted  to  a  separate  set 
of  commissioners. 

Finally,  Schedule  D,  which  contained  the  so-called  sweep- 
ing clause,  comprised  the  profits  arising  from  all  property 
not  taxed  in  Schedules  A,  B,  and  C,  as  well  as  "  the  annual 
profits  or  gains  from  any  profession,  trade,  employment,  or 
vocation  "  not  chargeable  under  Schedule  E.  In  the  case  of 
persons  residing  in  Great  Britain,  it  applied  to  all  property, 
whether  situated  in  or  out  of  Great  Britain,  as  well  as  to  any 
professions  or  trades  carried  on  in  Great  Britain  or  elsewhere. 
In  the  case  of  persons  not  residing  in  Great  Britain,  it  applied 
only  to  property  or  vocations  exercised  in  Great  Britain. 

The  schedule  was  divided  into  six  so-called  cases,  a  name 
taken  over  from  the  law  of  1799.  These  six  cases  were  as 
follows :  The  first  case  included  income  from  any  trade  or 
manufacture.  Here  the  tax  was  computed  on  an  average 
of  three  years'  profits.  No  deductions  were  allowed  for 
repairs  of  business  premises,  and  the  deductions  for  repairs 
and  for  tools  or  articles  used  in  carrying  on  the  trade  or 
manufacture  was  limited  to  the  average  of  three  years.  An 
important  point  in  which  the  act  of  1803  differed  from  that 
of  1799  was  that  in  computing  the  business  income,  no  deduc- 
tions were  permitted  for  interest  and  debt  except  in  the  case 
of  debts  to  foreigners  not  re-sident  in  Great  Britain.  In  the 
old  law,  where  the  entire  income  of  the  individual  was  ta.xed, 
debts  were  naturally  deducted ;  in  this  law,  where  the  object 
was  attained  in  another  way,  by  the  application  of  the  prin- 
ciple of  stoppage  at  source  in  the  other  schedules,  no  deduc- 
tion for  debt  was  allowed.  This  was  due  to  the  expectation 
that  the  debtor  would  pay  the  tax,  and  deduct  it  from  the 
sums  due  to  the  creditor.  The  object  of  this  regulation, 
which  is  still  in  force  to-day,  was  to  avoid  both  the  neces- 
sity of  disclosure  and  the  fraud  which  had  proved  to  be 
inseparable  from  the  older  methods.^    Apart  from  this,  how- 

'  \v'e  are  toll  that  under  the  old  law  "it  was  thought  necessary  not  to  compel 
the  debtor,  who  was  allowed  to  deduct  the  interest  of  del)ts  fmrn  the  income. 
tt>   dlSCIOae    the    ilAllie    ot     the    Cfcdilol.       Tiiia   in<!ui^<.IKc    ^a^   the    Oct^anivjll    oi    u 


96 


The  Income  Tax 


{\ 


ever,  the  principle  of  stoppage  at  source  was  thought  to  be 
inapplicable  in  this  schedule,  although  the  inquisitorial 
powers  conferred  upon  the  commissioners  were  supposed 
to  be  reduced  to  a  minimum,  and  the  commissioners  were 
"subject  to  the  strictest  obligation  of  secrecy." 

The  second  case  included  professions,  employments,  or 
vocations,  and  the  tax  was  assessed  on  the  "profits,  gains  and 
emoluments  within  the  preceding  year,"  without  any  deduc- 
tions. The  third  case  comprised  property  of  an  uncertain 
annual  value  not  charged  in  Schedule  A.  It  included  profits 
arising  from  canals,  docks,  water-works,  mines,  iron-works, 
and  salt-works,  when  not  let  at  a  certain  rent.'  The  tax  was 
assessed  on  the  annual  profits  or  gains,  except  that  in  the 
case  of  mines  a  five  years'  average  was  taken,  unless  the 
mine  was  "  failing,"  that  is,  decreasing  annually  in  output, 
or  in  case  it  stopped  working  altogether.  The  fourth  case 
included  the  interest  of  securities  in  Ireland,  in  any  of  the 
British  possessions,  and  in  any  foreign  countries.  The  fifth 
case  comprised  income  from  Irish,  colonial,  or  foreign  pos- 
sessions computed  on  a  three  years'  average.  The  sixth 
case  included  the  "  sweeping  "  clause,  that  is,  annual  profits 
or  gains  not  charged  anywhere  else.  In  the  whole  of 
Schedule  D  temporary  residents  were  to  be  charged  only 
after  six  months'  residence. 

The  system   of  exemptions  and   abatements  was  altered 


great  ilefalcation  in  the  revenue.  The  debtor  was  allowed  to  make  the  dcduc- 
tinii.  II.  iif  oursc,  in  every  instance  took  advantage  of  that  indulgence.  If  he 
also  indulged  ,  fraudulent  intention  he  might  overstate  the  amount  of  his  debt, 
inasmuch  a';  the  act,  for  waiit  of  a  knowledge  of  the  creditor,  afforded  no  check. 
If  the  creditor  was  inclineil  to  suppress  his  income  arising  from  interest  of  money, 
he  might  do  so  without  detection,  the  source  of  his  income  not  being  known. 
Under  the  present  measure,  no  inquiry  into  the  amount  of  debts  is  necessary; 
no  investigation  is  refjuired  which  can  affect  the  debtor's  credit.  Hit  duty  will 
coincide  with  his  interest.  The  transaction,  as  to  the  duty  payable  on  those 
deht.s,  will  pass  wholly  l)etween  the  debtor  and  the  creditor.  No  greater  sum 
can  be  (Uiluitfd,  whilst  the  amount  is  insured,  than  the  proportion  of  the  dulv 
to  the  sum  actually  paid.  No  disclosure  will  take  place,  whilst  the  revenue  is 
protected."  —  An  Exposition,  etc.,  1803,  pp.  46-47. 
'  Sees.  101-103. 


The   War  Income   Tax,  iygS-iSi6 


97 


I 


in  some  particulars.  Incomes  under  ;^6o  were  entirely 
exempted,  whi'e  from  £()0  to  ^150  a  gradually  diminishing 
abatement  was  permitted.  The  normal  rate  of  ta.x  applicable 
to  incomes  of  ^150  and  over  was  five  per  cent,  that  is,  a 
shilling  in  the  pound.  On  incomes  from  j^6o  to  Jijo  the 
rate  was  only  3^';  from  £'jo  to  ;^8o,  4^/,  and  so  on,  until 
incomes  from  /'140  to  £1^0  paid  i  \d.  The  allowances  for 
children,  which  were  made  applicable  whenever  the  number  of 
children  exceeded  two,  were  now  fixed  as  follows :  — 

On  incomes  from      /60  to    /;400.  4  %  for  each  additional  child. 

On  incomes  from    ^400  to  £  1000.  3  %  for  each  additional  child. 

On  incomes  from  £  1000  to  £,  5000.  :  "(,  for  each  additional  child. 

Over  £  5000,  i  %  for  each  additional  child. 

The  administrative  features  of  the  act  of  1803  were  copied 
from  that  of  1799,  with  a  few  significant  exceptions.  The 
General  Commissioners  were,  as  before,  selected  by  the  Com- 
missioners for  the  Land  Tax ;  but  provision  was  now  made 
for  the  appointment  of  a  new  class  of  commissioners  known 
as  the  Additional  Commissioners,  who  still  exist  to-day. 
These  commissioners  were  to  be  selected  by  the  General 
Commissioners,  with  qualifications  fixed  at  one-half  of  the 
property  necessary  for  the  latter.^  Not  more  than  seven 
nor  less  than  three  of  these  were  to  act  in  any  district,  and 
they  might  divide  themselves  into  committees,  if  necessary. 

The  Additional  Commissioners  were  now  to  assess  the  dutv 
in  Schedule  C,  which,  as  before,  did  not  apply  to  government 
stock  held  by  foreigners.^  In  Schedule  D  the  assessors  were 
to  be  summoned  by  the  Additional  Commissioners,  and  all  re- 
turnn  were  to  be  made  to  them.-*  If  the  surveyors  or  inspect- 
ors, however,  were  dissatisfied  at  the  decision  of  the  Additional 
Commissioners,  they  might  require  them  to  "  state  a  case"  for 
the  General  Comniissioners.  The  Additional  Commi.ssioners, 
moreover,  might,  of  their  own  volition,  in  general  refer  any 
statements  to  the  General  Commissioners. 

In  Sch>,dules  A  and   B,  the  surveyors  or  inspectors,  who 


'  -Sees.  iS-20. 
tl 


.^ct.  71. 


'  i>ecs.  405  el  stq. 


98 


The  Income   Tax 


were  to  be  the  same  as  those  appointed  to  enforce  the  duties 
un  houses  and  windows,  and  the  assessed  taxes,  might  amend 
or  surcharge  the  returns  of  individuals  as  brought  in  by  the 
assessors.  The  surcharge  was  to  be  treble  duty ;  but  the 
officials  were  subjected  to  a  severe  penalty  in  case  they  made 
"  a  false  or  vexatious  surcharge."'  A  new  provision  was  also 
inserted  for  the  business  assessments.  If  the  taxpayer  pre- 
ferred, he  might  nominate  two  referees  who,  when  satisfactory 
to  the  commissioners,  were  to  estimate  the  profits  from  such 
certificates  or  o*:her  documents  as  might  be  submitted  to  them 
by  the  taxpayer.  If  the  referees  could  not  agree,  a  third  ref- 
eree might  be  appointed,  the  decision  of  the  majority  to  be 
binding.*  The  referee  might  also  serve  in  cases  where  appeals 
were  made  against  any  assessment  by  the  Additional  Com- 
missioners, or  against  any  objection  made  by  the  surveyors  or 
inspectors.^  The  general  penalty,  where  assessments  were 
increased  or  where  persons  were  convicted  of  fraud,  was 
now  fixed  at  double  the  duty,*  while  the  penalty  for  neglecting 
to  deliver  a  schedule  or  to  attend  the  summons  of  the  com- 
missioners was  ;^50.  It  was  also  provided  that  the  tax 
should  be  payable  in  quarterly  instalments.*  Finally,  a 
curious  survival  of  the  triple  assessment  consisted  in  the 
provision  made  for  the  acceptance  of  voluntary  contributions 
from  citizens.* 

Thus  was  introduced  into  England  the  principle  of  stoppage 
at  source  in  the  income  tax.  As  compared  with  the  old  method 
of  the  direct,  lump-sum  assessment  of  incomes,  the  effects 
were  immediately  noticeable.  Although  the  rate  of  the  new 
tax  was  only  one-half  of  the  old  one,  —  five  percent  instead 
of  ten  percent,  —  the  yield  was  almost  the  same, —  ;£^5, 350,000 
in  1803  as  compared  to  ^5,600,000  in  1801.  In  other  words, 
the  alteration  in  the  principle  of  assessment  at  one  blow 
doubled  the  efficiency  of  the  ta.x.  No  more  signal  proof 
could  be  afforded  of  the  vital  importance  of  good  administra- 
tive methods  in  fiscal  practice. 


•  Sees.  6^-64. 

*  Sees,  III/'/  K^q, 


^  Sec.  157. 

*  Sec»,  1 5^?-!  56- 


»  Sec.  210. 
»  Sec,  218. 


The   War  Income  Tax,  179S-1816 


99 


The  old  opponents  of  the  system  could  not  reconcile 
themselves  to  the  law,  however.  Travers,  for  instance,  sent 
out  a  circular  letter  calling  for  a  mass  meeting  to  agitate  for 
a  repeal  of  at  least  that  part  of  the  tax  which  applied  to  busi- 
ness profits.  In  a  letter  addressed  "  to  the  Citizens  of  London 
engaged  in  commerce  and  profession,"  he  stated:  "The  tax 
on  property,  so-called,  is,  in  fact,  a  revival  of  that  most  hate- 
ful tax  —  the  tax  on  income,  under  more  severe  and  objec- 
tionable restrictions."  •  The  letter  was  sent  to  the  mayors 
of  the  various  towns.  Some  officials,  like  the  town  clerk  of 
Northampton,  applauded  his  "laudable  and  patriotic  e.xer- 
tions  for  procuring  a  repeal  of  that  odious  and  degrading  part 
of  the  Property  Tax  Act,  which  relates  to  trade  and  com- 
merce." Others,  on  the  contrary,  like  the  mayor  of  Totnes, 
considered  "  that  the  tax,  in  its  present  form,  is  perfectly  just 
and  reasonable:  it  is  just,  as  it  affects  property  of  every 
description  ;  and  it  is  reasonable,  from  its  scale  of  ta.xation."* 
The  City  of  London,  which  had  prided  itself  on  contributing 
to  the  repeal  of  the  tax  in  1802,  held  a  public  meeting  in  July, 
1803,  to  con.sider  the  matter.  Some  extremists  declared  that 
if  the  income  tax  were  necessary  to  save  the  country,  it  would 
be  better  to  have  the  country  go  than  to  endure  the  tax.  But 
others  said  that  it  would  be  wiser  to  declare  part  of  one's 
profits  to  the  income  tax  commissioners  than  to  give  up  all 
to  Napoleon.  As  a  consequence,  no  resolution  was  adopted. 
The  most  vociferous  opponent  of  the  measure  was  Frend, 
who  poured  out  the  vials  of  his  wrath  on  "  the  present  falsely 
called  Property  Act,  .  .  .  which,  thotigh  less  oppressive  on 
income,  is  far  more  inquisitorial  than  the  last."  ^     In  forming 

'  He  adiled  :  "  When  the  odious,  degrading,  and  injurious  nature  of  the  tax  is 
considered,  the  vexatious  and  tyrannical  inquisition  it  will  give  rise  to,  and  more 
especially  the  immorality  of  its  tendency,  by  reason  of  the  utter  inipossiliility  of 
ascertaining  income  of  this  kiml  ...  it  is  earnestly  hoped  that  the  citizens  of 
London  will  show  their  unqualified  abhorrence  of  a  tax  which,  if  persisteil  in, 
cannot  fail  to  excite  the  most  general  discontent."  This  letter  is  printed  in  full 
in  Frend,  'J'he  Principles  of  Taxation,  1S04,  p.  16.  I'or  full  title,  sec  siifra, 
p.  88. 

*  Frend.  ;•/.  ci!.,  pp.  tS,  20.  '  Frend,  cj<.  ci!.,  pp.  iii,  iv. 


lOO 


The  Income  Tax 


our  estimate  of  a  tax  we  must  consider,  said  Frend,  "  not  only 
the  sum  laised,  but  the  frauds,  the  perjuries,  the  prevarica- 
tions, the  imprisonments,  the  ruin  of  families,  the  destruction 
of  morals."  »  The  new  law,  moreover,  he  thought,  was  so  com- 
plicated as  to  be  unintelligible.^  The  government,  however, 
went  its  way  undeterred  and  undismayed,  and  the  murmurings 
gradually  subsided. 

In  1805  the  exigencies  of  the  war  caused  Pitt,  who  was 
now  again   in  office,   to   propose  and  to  carry  through   an 
addition  of  one  fourth  to  the  income  tax,  the  rate  now  being 
increased  from  five  to  six  and   one-quarter  per  cent.*     Fox 
objected  that  the  tax  "  was  taking  little  by  little  from  the  projj- 
erty  of  the  subject  till  the  reduction  was  tantamount  to  the 
risk  of  the  whole,"  but  Pitt  held  that  it  would  be  "most 
desirable  to  levy  direct  rather  than  indirect  taxes  as  far  as 
possible."*     A  subsequent  act  of  the  same  year^  provided 
for  several  changes  in  the  regulations.    Among  the  important 
ones  were  the  following :  the  transference  of  the  assessment 
of  "  concern?  about  lands,"  «  from  Schedule  D  to  Schedule  A, 
where  they  still  remain  to-day ;  the  provision  that  the  profits 
of  a  married  woman  living  with  her  husband  be  considered 
a  part  of  his  profits ;  ^  a  further  allowance  of  deductions  for 
repairs  in  Schedule  A  ;»  the  extension  of  exemption  to  chari- 
table mstitutions  in  general  in  Schedule  A ;  the  deduction  of 
the  tax  paid  on  business  premises  in  Schedule  B  from  the  tax 
due  on  business  profits  in  Schedule  D ;  and  the  adoption  of 
a   new   rule   in  the  third    case  of   Schedule   D.  relating  to 
"profits  on  exchequer  bills  and  other  securities  bearing  inter- 
est out  of  the  pubhc  revenues  and  on  all  discounts  and  on  all 
interest  of  money  not  being  annual  interest."  » 

'  Frend,  The  J'rincipUs  of  Taxation,  p.  9. 

^  Keferring  to  the  act  itself  in  ,,4  folio  page,  and  the  />/.«/,.„  in  66  8vo 
pages,  trend  said:  "  Ohcurum  per  cbscurius.  If  there  is  a  single  man  m  the 
kingdom  who  understands  cither  the  one  or  the  other.  I  congratulate  him  on  his 
patience  and  attention."—  Op.  cil.,  p.  20. 

"  45  George  1 11,  c.  1 5.  0  See  u.pra,  p.  93. 

Hansard,  vol  iii,  ,,p.  552  r/  ..,/.  :  Scc.  loi. 

'45<-'-urgeIII,  c.  49.  !S,-,-,,  MK-     -, 


L^»ai2i.^Jt.^i:'7«JKJIlft*iIJiaEti-S*J«-.ivy^ir-.viC?t3»;8:;.i*.lt^*Hi=J' 


The   War  Income   Tax,  i7gS-iSi6 


lOI 


In  1806,  ;i»ter  the  battle  of  Austerlitz  and  the  death  of 
Pitt,  the  coalition  ministry  of  Grciiviile  and  Fox  came  into 
power,  and  the  rate  was  further  increased  by  the  new  Chan- 
cellor of  the  Exchequer,  Lord  Henry  Petty,  to  ten  per  cent. 
Petty  defended  the  increase  on  the  ground  that  "  a  gradual 
rise  would  have  led  to  the  supposition  that  this  was  a  fund  to 
be  drawn  upon  to  an  indefinite  extent;  but,  being  raised  at 
once  to  its  natural  limit,  there  would  be  less  suspicion  of 
future  augmentation."  Fox  now  stated  that  this  explanation 
satisfied  him,  although  Francis  pertinently  asked  "Why  is 
ten  per  cent  a  more  natural  limit  than  eleven  per  cent.'"' 
The  experience  with  the  law,  however,  had  disclosed  several 
defects,  so  that  advantage  was  taken  of  the  opportunity  to 
make  some  notable  changes  in  the  system.  As  the  law  now 
in  force  is,  with  slight  alterations,  a  virtual  reprint  of  the  Act 
of  1806,  it  merits  special  attention. 


§  7.    The  Act  of  1806 

As  early  as  1805,  Heslop  had  published  a  pamphlet  in 
which  he  pointed  out  some  of  the  shortcomings  of  the  tax 
with  special  reference  to  the  abatements,  which  he  thought 
had  been  carried  too  far.'  Relying,  however,  chiefly  on  the 
advice  of  the  administrative  officials,  Lord  Petty,  in  introduc- 
ing the  bill  and  in  alluding  to  the  frauds  which  had  been 
committed  by  persons  claiming  total  exemption,  proposed 
that  these  exemptions  should  be  materially  restricted.  In 
the  debate  of  May  20,  1806,  Vansittart  declared  that  "for 
three  years  exemptions  had  been  tried  and  were  uniformly 
found  to  defeat  themselves  and  the  operation  of  the  tax." 
The  government,  therefore,  had  no  difficulty  in  carrying 
through  its  proposals. 

'  Mansard,  vol.  vi,  p.  1577. 

'^  Ofnerr.i/ioiis  mi  the  fiuty  on  Proptrty,  I'rofessioiis,  etf.,  to  render  its 
.4ssessmfnt  simplf  and  to  Improve  it.  [By  I.uke  Hcslop]  I.on.lun,  n.  d.  [1805]. 
1  It-slop  also  aiivocatfil  tlie  principle  of  disirimination,  with  highei  rates  on  what 
he  I  ailed  permanent  property.      I/,  pp.  13  et  seq. 


KSir^'inxi^:K^j&.'^i^xaaKiii:i!iB^jr-atS:-^ir:^ifi.^..':£^s\'  «■>  ,-"T5iis>-ii--Bsa:«Kai: 


I09 


The  Income  Tax 


>      ! 


The  new  •'  property  and  income  tax  act,"  as  it  was  now 
called,  which  was  especially  limited  to  the  April  following  a 
definitive  treaty  of  peace,' contained  three  important  classes  of 
modifications,  most  of  which  have  remained  to  the  present 
day.  The  first  was  the  extension  of  the  stoppa^eat-source 
idea  originally  applied  in  Addington's  act  of  1803.  It  will  be 
remembered  that  in  Schedule  C,  while  the  Rank  of  Kngland 
was  required  to  make  certain  returns  as  to  the  dividends 
from  the  public  funds,  the  tax  itself  was  assessed  on  the 
owner  or  his  agent,'  ,  Henceforth,  however,  the  Bank  of 
England  itself  was  requited  to  make  the  assessment  and  to 
deduct  the  tax.  Foreigners  not  resident  in  the  British  do- 
minions were  exem  n  upon  proof  of  their  claims.  Thus  was 
Schedule  C  assimilated  to  Schedules  A,  B,  and  E.  Moreover, 
Schedule  C  was  now  enlarged  by  taking  over  from  the 
third  case  of  Schedule  D  the  duty  on  all  securities  issued  at 
any  governmental  office. 

The  second  class  of  alterations  involved  the  abatements 
and  deductions.  In  the  first  place,  the  right  of  total  ex- 
emption was  declared  inapplicable  to  incomes  derived  from 
property,  such  as  real  estate,  securities,  and  moneyed  capital 
in  general,  with  a  few  minor  e.xceptions.3  The  total  exemp- 
tion, hence,  was  restricted  substantially  to  incomes  from 
trades,  professions,  and  personal  exertions.* 

Secondly,  the  limit  of  total  exemption,  in  the  cases  where 
it  still  remained,  was  reduced  from  £60  to  £  50.  The  reasons 
for  this  change  are  well  put  in  the  official  Guide  Book.     "So 

>  46  Oeorgc  III,  c.  65.  «  An  Act  for  granting  t..  hi.  Majesty  .luring  the  present 
war,  and  unt>l  the  sixth  ,lay  of  April  next  after  the  ratilication  „f  a  .letinitive  tr.aty 
of  peace,  further  a.lditional  rates  an,|  duties  in  ( Ireat  Hritain  on  the  rates  an.l 
.luties  on  protits  arising  from  property  an.l  pr<.fessi.,ns.  trades  an.l  ..ffices." 

^  The  last  provision  as  to  agents  ha.l  been  repeale.l  by  44  llcrge  III.  c.  37. 

These  were  cottages  not  exceeding  forty  shillings  a  year.  ..ccupie.I  by  the 

owners;   properly  not  excee.linR  the  annual  •    .ue  of  ^5,  belonging  to  laborers 

uJiose  wages  .li.l  n.)t  excee.l  thirty  shillings  a  wee.:;   ecclesiastical  profits;   pr.-fits 

of  mines  an.l  quarries,  and  annuities  under  /  50  a  year. 

♦  Dowell.  Hutoryof  Taxatwn,  2d  e.l..  iii.  p.  ,03.  is  characteristically  inaccu- 
rate m  stating  that  it  applie.l  only  to  wage-earners,  liuxt.-n,  I.nau.e  and 
.  ohhcs,  .,  p.  309.  who  evidently  copied  from  Dowell,  makes  the  5ame  mistake. 


The   War  Income   Tax,  I7g8-i8i6 


103 


t 


baneful  is  indulgence  on  weak  minds  that  this  regulation, 
intended  to  have  a  strict  and  limited  operation,  has  been 
introductive  of  the  greatest  fraud  on  the  public,"  many  people 
in  easy  circumstances  having  returned  their  income  as  just 
under  /,6o.'  In  the  third  place,  the  system  of  abatements 
was  so  changed  that  with  every  pound  of  income  below 
^150,  I  shilling  tax  was  deducted;  thus,  at 

£  JO  tiie  charge  was  loof. 
^51  the  cliarfjc  wuH  iojj. 
£  53  the  charge  was  104s. 


The  abatement  was 

lOOf. 

The  tax  was     os. 

The  abatement  was 

99J. 

The  tax  was      y. 

The  abatement  was 

9«.. 

The  tax  was     6s. 

and  so  on,  until  at 

The  abatement  was 

Is. 

The  tax  was  297J. 

The  abatement  was 

0.1. 

The  tax  was  30OJ. 

/149  the  charge  was  29X.S. 
£  1 50  the  charge  was  jooy. 

Fourthly,  is  the  deduction  for  children  under  the  old  law 
had  led  iv.  n  astounding  official  increase  of  large  families, 
this  was  ...>w  discontinued.  Fifthly,  the  allowance  for 
repairs  to  houses  in  Schedule  A  wat-  abandoned,  for  the 
reason,  as  stated  in  the  Guide  Book,  that  it  had  been  found 
"so  inadequate  and  to  operate  so  inequally,  and  to  be 
demanded  in  many  cases  where  repairs  were  done  by 
tenants."*  Finally,  the  allowance  for  life-insurance  pre- 
miums was  restricted  to  persons  with  an  income  under  .^^150. 
Several  changes  were  also  made  in  the  deta.is  of  the  differ- 
ent schedules.  In  Schedule  A,  where  the  ordinary  rule  was 
the  as.sessmcnt  on  the  profits  for  the  year,  tithes  in  kind  were 
assessed  on  an  average  of  three  years,  manors  and  other 
royalties  on  an  average  of  seven  years,  and  mines  on  an 
average  of  five  years.  In  Schedule  B,  warehouses  and  other 
business  premises  were  exempted  from  taxation.  In  Schedule 
D,  in  the  third  case  applying  to  profits  of  "an  uncertain  annual 
value  "  a  new  provision  was  inserted  applicable  to  dealers  in 
cattle  and  sellers  of  milk.  Where  the  lands  occupied  by  such 
dealers  were  not  sufficient  for  the  sustenance  of  the  cattle, 
so  that  the  rent  of  the  lands  did  not  afford  a  just  estimate  of 
the  profits  of  the  dealer,  the  commissioners  were  authorized 
to  increase  the  charec. 


'  GuiJe  to  the  Property  Tax  Act,  1806,  p.  13. 


Op.  cit.,  p.  14. 


J 


I04 


The  Income  Tax 


The  important  changes  in  administrative  procedure  were 
as  follows:  In  the  first  place,  the  whole  system  of  referees,  as 
provided  in  the  law  of  1803,  which  had  not  worked  well,  was 
now  droj'ped.  The  system  of  Additional  Commissioners  was, 
on  the  contrary,  retained.  In  the  next  place,  provisi')n  was 
made  for  a  new  set  of  commissioners  known  as  commission- 
ers for  the  "  special  purposes  of  this  Act,"  or,  for  short, 
Special  Commissioners.  These  weie  invested  with  the  func- 
tion of  gfranting  allowances  in  Schedule  A,  of  supervising  the 
exemptions  in  .Schedule  C,  and  of  taking  charge  of  the 
assessment  of  foreign  dividends.  These  Special  Commis- 
sioners were  not  se'ected  by  the  General  Commissioners,  as 
were  the  Additional  Commissioners,  but  were  anpointed  by 
the  Commissioners  for  the  Affairs  of  Taxes,  representing 
the  central  government. 

The  provision  as  to  the  liability  to  the  tax  after  six 
months'  residence  was  altered  so  as  to  make  the  residence 
cumulative;  that  is,  if  a  person  resided  in  England  for  a 
short  time,  then  departed,  and  again  returned,  he  was  liable, 
if  during  the  year  he  had  resided  altogether  for  a  period 
of  six  months.'  The  provisions  with  reference  to  assessors, 
notices,  lists,  etc.,  which  had  previously  been  confined  to 
Schedule  D,  were  now  made  applicable  to  all  schedules. 
The  abaten.  jnt  in  Schedule  D  which  was  permitted  to  tax- 
payers when  they  could  prove  that  their  actual  profits  were 
less  than  the  amount  assessed  upon  them  and  which,  under 
the  law  of  1803,  had  been  allowed  only  where  the  taxpayer 
was  not  assessed  on  the  average  system,  was  now  extended 
to  all  cases,  irrespective  of  whether  the  taxpayer  had  been 
assessed  on  his  year's  profits,  or  on  the  three  year.-'  average 
systeni.2  In  all  other  respects,  however,  the  administrative 
provisions  of  the  earlier  laws  were  continued. 

The  imi)rovements  efifected   in  the  operation   of   the  law 

through  the  extension    of   the  stoppage-at-source   principle, 

and  through  the  alterations  mentioned  above,  were  at  once 

reflected  in  the  yield.     The  rate,  as  we  have  seen,  was  raised 

'  ''^^-  52-  »Sec.  i?9. 


The   War  Income   Tax,  i^gS^  1816 


105 


from  six  and  one-fourth  to  ten  per  cent ;  yet  the  produce  of 
the  tax  jumped  from  X6,429,599  in  1805  to  /,  12,822,056  in 
1806.  In  other  words,  roughly  speaking,  an  increase  in  the 
rate  of  the  tax  by  only  one-half  doubled  the  yield ;  a  fifty  per 
cent  augmentation  resulted  in  one  hundred  per  cent  increase 
in  the  produce.  This,  again,  affords  a  striking  illustration 
of  the  significance  to  be  attached  to  administrative  methods. 

During  the  continuance  of  the  war,  that  is,  for  just  a  decade, 
the  tax  remained  in  force  at  the  same  rate  of  ten  per  cent. 
Owing  in  part  to  the  growth  of  population  and  industry,  but  in 
still  larger  measure  to  the  increasing  efficiency  of  the  admin- 
istrative methods,  the  yield  of  the  tax  gradually  rose,  until 
toward  the  end  of  the  perit)d  its  produce  amounted  to  almost 
Xi6,ooo,ooo  —  well-nigh  eighty  million  dollars  —  a  prodigious 
sum  for  those  days.  ;\s  a  fiscal  device,  there  could  be  no 
doubt  as  to  its  success. 

The  fame  of  the  income  tax  spread  to  the  Continent.'  The 
literary  critics  were  gradually  silenced,  and  were  limited  either 
to  well-meaning  and  somewhat  crack-brained  enthusiasts,  like 
Coad,  who  imiuded  well-nigh  all  existing  taxes  in  his  denun- 
ciations,- or  to  writers  like  Grey,  who  demanded  a  reduction 
of  the  burdens  on  particular  classes,  as,  for  instance,  the  mili- 
tary and  naval  officers.^     Several  efforts  were  made  by  the 


'  (/.  /'(/J  lirilistht-  Kfitfiiiiuiis^i-Syilaii,  inshesouilerf  die  Eiitkoinmeiistetier, 
iliirgi'lellt  lint  IliitsiJit  aiil'  die  in  c/,r  /'i;iis^i.i,  ''/.'ii  .1/i>ii(iii/iif  :u  lifffeiuhn 
I'.ini ichluiis^eii.  Von  Frielrich  von  Raunier.  Berlin,  1810.  Raunu-r,  Iiowcver, 
is  much  o]>p(ise(l  to  tl.c  whole  siheme.     See  es|i.  ji.  z},},. 

-  t'oa^l  speaks  of  the  income  tax  as  being  "  in  its  nature  tlie  most  perplexing, 
in  its  el'teits  the  1110; '  ruinous,  an. I  in  its  opperations  (,.;,)  the  most  partial."  — 
./  Xci'  riiiii  I'f'  /'tixii/ii'ii.  Tills  riiiii  r,'///  vt'iidt-r  tht'  Ciiitoiii  iiihi  F.wise  Dtitifs 
tuf/fss,  nlvli'li  the  !ii,;-iii,-  Tnx,  liikr  off  nil  thf  AfsfneJ  Tiixes,  and  rrdiice  l\ovi- 
uons  more  tiuin  Seiciitv  per  cent,  el,.  By  Joseph  Coad.  London,  1S07,  p.  10.  lie 
uses  almost  ei|ually  violent  languai;c,  however,  as  to  all  other  taxes,  except  the 
land  tax  and  the  poll  tax,  which  constitute  his  "  new  plan  of  finance." 

•'  '  '.rev  grows  very  eUniucnt  in  his  metaphors.  "  The  tax  has  no  passover  ;  the 
destrovini;  an,i;el  visits  every  door,  all.iws  of  the  v:\li'lity  .  f  no  mark  of  blood  on 
the  lintel  ami  side-posts,  to  induce  him  to  pause  in  his  destructive  course  ;  for  the 
destrover  comes,  with  ferocious  swoop,  into  our  hoi  scs,  to  smit-  us  and  our  first- 
born ;    no  (Uior  is  exempt  from  Ins  due  vHitations.'   —  .f  J.ettrr  Ajiimsed  bv  (  i>/. 


io6 


The  Income   Tax 


opposition,  but  to  no  avail,  in  1806,  1808  and  1809,  to  abolish 
the  exemption   for  foreign   holders  of   government   stock.' 
The  Scotch  farmers  also  complained,  in   1808  and   i8io,  of 
the  method  of  assessing  profits  on  the  basis  of  rentals,  hold- 
ing that  farmers'  profits  were  often  as  fluctuating  as  those  of 
business  men.^     In   i8ii,  Turton  protested  against  the  lack 
of  what  would  now  be  called  both  differentiation  and  gradu- 
ation, but  the  Chancellor  of  the  ICxchcquer  objected  to  both 
schemes,   stating   as   to   the  latter  that    "as    for    laying   a 
higher  income  tax  upon  the  richer  classes,  it  would  be  a 
complete  subversion  of  all  the  principles  of  justice,  by  which 
the  property  of  al^  men  should  oe  equally  protected  by  the 
law."  3      In  the  main,   however,    a'.l  discussion   of   the   tax 
wa.  silenced  in  the  face  of  the  gigantic   struggle  against 
Napoleon. 


V 


§  8.    The  Repeal  of  the  Income  Tax 

As  the  war  drew  to  a  close,  however,  a  movement  was  set 
on  foot  to  compel  the  government  to  redeem  its  pledge  and 
to  drop  the  tax.  The  City  of  London,  as  u.sual,  led  in  the 
agitation,  and  drew  up  a  petition  in  December,  18 14.  Other 
towns  followed  during  the  next  few  months.  When  parlia- 
ment opened,  in  February.  181 5,  Vansittart,  Chancellor  of  the 
Kxchequer.  declared  that  he  did  not  intend  to  renew  the  tax 
He  stated  that  it  ought  to  be  held  "as  a  great  and  powerful 
resource  which,  in  times  of  public  emergencv,  might  and 
ought  to  be  resorted  to,"  but  he  thought  that  the  great  fluctu- 
ations in  prices  then  going  on  would  "  render  it  peculiarly 
ve.xatious  and  disagreeable  to  large  classes."  <  So  great  was 
the  joy  occas'oned  by  the  announcement  that  Tiernev  made  a 
celebrated  speech  with  a   peroration   in  which  "he   begged 

Mn  Crfv  10  a  M,.„bfr  of  tht  Ihust  cf  Ccmmcns  on  the  Suhe,t  cf  tht  liahility 
or  tk<  {\,y  cftkf  (W,  ,rs  or  thi  Xav.  .,nJ  .tr,„y  to  !'u  T.J.r  uton  r,ofi,tv  Lon- 
don, iSlo,  pp.  ;S.  2<4.  ' 

'  N;e   Hansar.l.  v,  1.  v,i.  p.  407  ;    vol.  xi.  p.  S.iS;   vol.  xiv.  p.  ,oi8. 

«  >ee  the  Fi-mfrs   V.^-iutf  for  I  S0&, /,;.-.,«.  an.!  lor  iSic.  p.  ;i<,. 

•  Han»»r.l.  V..I   »>    .,    -.»  ,  ..  .        : 


The   War  Income   Tax,   ijs)S  iSi6 


lo: 


I 


pardon  of  God  and  of  ll\c  piihlii-  for  the  part  he  hail  takoii 
in  imposinR  the  jjroperty  tax  in  iSof)."  "  [ju'  greatest  nieiil 
of  the  tax,"  said  he,  "was  ti)e  dislike  so  >;iiiiiaily  felt  to  it, 
and  if  it  could  bo  held  out  to  the  people  ///  trironin  ai;ainsl 
entering  into  war,  it  had  done  };ieal  servii  e  indeed."  ' 

There  were  not  wanting;,  indeed,  ;d)le  and  lar  sij;hteil 
men,  both  in  and  out  of  parliament,  who  contended  that  it 
would  be  a  serious  mistake  to  destroy  tlu'  system  that  had 
been  so  laboriously  built  up.  Thus  the  anonymous  author  of 
an  excellent  mono};raph  Vailed  attention,  at  the  close  ol  iSi/), 
to  the  "considerable  pains  that  have  bi-en  oi  are  about  to  be 
taken  to  prejudice  the  public  mind  on  the  sul)i(i  t  o(  the  prop 
erty  tax."  He  ascribed  to  the  income  lax  mm  h  of  the  exist- 
ing prosperity,  and  in  di.seussing  t!ie  great  pntdiictiveness  of 
the  tax,  he  asked  whether  anyone  would  claim  that  "the 
(so-called)  infjuisitorial  power  attached  to  its  assessment  and 
collection  has  been  more  a(  tive'y  and  vc  ously  exerti;d. 
This  assertion,"  he  thought,  "no  one  wn,  le  found  bold 
enough  to  make,  for  it  is  self-evident  that  the  inconvenieiu cs 
oi  this  nature  have  rather  diminished  than  iturea.sed."'''  In 
another  place  he  tells  us  that  "  its  inrpiisitorial  powers  have 
in  a  great  measure,  as  to  practice,  gone  to  the  '  Tond)  of  all 
the  Capulets.'  Those  who  recollect  the  impost  in  the  earliest 
stages,  will  all  join  in  this  o{)inion."''  After  adverting;  t(.  the 
unexpected  augmentation  of  the  yield,  he  asked  :  "  To  what 
cause,  then,  is  the  increase  of  its  t)rodiice  to  be  asiribed.'" 
"To  r')thing,"  he  reph'cd,  "but  the  effu  a(  y  and  '-xiellente  of 
its  principle."  "Why,  then,"  he  asked,  "destroy  in  its  in- 
fancy a  system  calculaterl  to  (  ali  forth  the  wealth  of  the  nation, 
to  enable  it  to  expanrl  its  {)Owers,  to  increase  its  en<r;ocs,  .infl 
in  a  great  measure  relieve  it  from  the  hfjrril)!*-  burthen  of  debt 
under  which  it  now  groans.'  '     kefcrrini.^  to  the  (,p])t,.,\\\<,u  to 

'  Hansarl,  thiJ.,  p.  87;. 

*  Strong  Keiiion:  f>r  th'  '  />nlinuan"  nf  i!,>  l'rr.p,r)y  /„,,  7,,-iiJ,i)li  n  ■nlil'il 
an  Eitimatt  of  tht  .\'tUn:i  Inrom'  r^'n'ly  miU  ' y  I'atrir k  f'n/i/uhnun.  i'.y  » 
Friend  tt.  h'»  r"or,nfr-.'        [  /.n.]..n^   !^!d.  L*.   12. 

'  <>/■  "/.,  pp.  34.  35-  *  "/•■    I':  pp.  12-14- 


io8 


The  Income   Tax 


the  tax,  he  pointed  out  that  "  its  character  is  curious.  It  par- 
takes of  those  symptoms  always  indicating  a  mind  tinctured 
with  prejudice,  and  prejudice  of  the  grossest  and  most  ignorant 
kind.  It  seems  to  be  a  species  of  mania.  " '  The  author 
closed  his  refutation  (jf  the  objections  by  stating  :  "  I  contend 
that  so  far  from  the  tax  bearing  the  features  ascribed  to  it, 
that  there  are  no  proofs  of  their  existence.'"'' 

Another  writer,  although  nominally  opposed  to  the  "pres- 
ent income  or  property  tax,  "  suggested  what  he  called  "the 
general  substitute,"  which  on  close  analysis  turned  out  to 
be  nothing  but  a  general  income  tax.  For  individuals,  he 
thought,  ought  to  pay  according  to  their  abilities,  and  "  the 
means  to  be  employed  as  a  criterion  of  their  abilities  which  is 
the  best  that  can  be  procured  of  all  criterions,  is  the  inc  ..  e 
of  the  parties."  3  A  third  writer,  who  described  himself  as 
"a  considerable  landed  proprietor,"  said  that  he  was  "one  of 
those  who  certainly  thuik  that  an  income  tax  has  some  ad- 
vantages that  make  it  very  proi)cr  to  be  retained."  •«  The 
author,  nevertheless,  inclined  to  the  opinion  that  taxes  on 
commercial  and  trade  profits  were  inadvis  ble,  because  of  their 
tendency  to  be  shifted  to  the  consumer. 

The  most  weighty  defence  of  the  tax,  however,  was  made 
by  Rose  in  a  speech  in  parliame.it.  Baring  had  maintained 
that  "  the  property  tax  is  the  most  unjustifiable  and  oi)pressive 
measure  of  finance  that  has  ever  been  resorted  to  in  any 
country  on  ear.h.  .  .  ."^  Ail  the  opprobrious  epithets  that 
had  been  heaped  upon  it  ajipeared  to  him  not  to  come  up  to 
its  deserts.     Rose,   in  his   reply,  did    lot  deny  that   the  tax 

>  Slnnii^'  Kf.uons,  etc.,  p.  73.  a  Qp.  at.,  p.  74. 

■^  Thrtt  most  /mp.nt.int  Objects  PtopoifJ.  I'.y  the  author  of  The  Income  and 
J'roperly   /,tx.      York,  1815,  p.  26. 

*  / :i:t  /,•/.',■>•,■  I,,  /!,,,  /^'i^«,t  IfonoiirMe  Vis.nuiif  i'.i^fL-reii^'h,  on  the  Preienl 
Sitii„/i  n  o'th,-  l.uUcl  Intfrci,  and  the  [ntni.i.d  I'.iytial  A'rp,;,!  of  the  Income 

r.i.x.    1..1M.1  . ,  iSk'),  p.  16. 

■  '•  In  theory,"  he-  aiUlc.i,  "it  mii;ht  \k  very  l)c-auliful  to  tas  evory  man  accord- 
ing  to  his  property,  hut  nothing  couhl  he  more  o.lious  than  that  a  man  shnuM  l)e 
catechised  hy  pers(,i,-  who  possessed  more  than  in.|iiisitorial  powers.    K„r  liis  own 

rart.   he  would   nun  h  r:iihi-r  !.,■   iii...,.,.."-.i   i...!..-.-  'i...   > >-     r  1:  i  ,     ■ 

.piestione.!  as  to  his  belief  in  the  do.  trinal  points  ofrelifjion,  than  ap|>ear  hefore 
the  commissioners  umler  the  property  t,i\.'' 


The   War  Income   Tax,  lyc^SiSid  109 

"has  been  felt  as  a  most  severe  pressure  by  many,  ""  hut 
after  recounting  the  history  of  tiie  tax  aiulthe  enormous 
services  which  it  had  rendered  to  the  country,  he  contended 
that  its  abolition  would  necessitate  the  layinf;  of  f,c,sh  taxes 
which  would  "not  only  be  more  opprc'^sive  than  the  one  so 
strongly  objct  .d  to,"  but  would  result  in  shifting  the  bur- 
den of  supporting  the  state  from  those  better  able  to  j.ay  to 
those  of  less  ability.  If  the  income  tax  is  abolisheil,  he  warns 
us,  "those  who  can  best  bear  the  burden  can  be  relieved 
only  at  the  expense  of  persons  less  opulent  and  in  inferior 
situations  in  life."  '^  In  conclusion,  Rose  expressed  himself  as 
"satisfied  to  conviction  on  very  long  experience  and  deep 
reflection,  that  the  ingenuity  of  man  cannot  devi.se  so  wise 
and  provident  a  mode  of  raising  the  money  inimedi^iti-Iy 
wanted,  as  by  the  Property  Tax  amended  and  modified."'' 
The  escape  of  Napoleon  from  I':iba  a  few  days  later,  on 
February  26,  18 15,  created  the  greatest  consternation,  and 
led  the  government  to  reconsider  its  determination.  On 
April  17,  Vansittart  propo.sed  to  continue  the  tax  for  an- 
other year,  and,  after  considerable  opposition,  carried  his 
point.  Whitford  warned  the  Hou.se  that  if  again  imposed  it 
would  be  saddled  on  the  country  forever,  and  Ponsonby 
stated  that  "few  persons  in  the  House  or  out  of  it  would  live 
to  see  it  taken  ofT."  The  Marquis  of  Douglas  concluded  that 
the  tax  was  unjust  and  unconstitutional,  and  frankly  stated 

■  The  Speech  atlracteU  such  wiik-  atUnli m  th.it  it  wa'4  rrprinl.  .1  in  a  painplilcl 
entillf.l  '//„■  S/.,;-ci  of  tUe  K.^^hl  llon.ur.ilU-  (/,,.,;,,■  /,■,.„■  ,„  il,,-  //^mr  rf  C  ,„- 
I'lom  .11  the  jolh  vf  lehiuary,  /  V/j,  ,,„  //,,.  Sii'n.l  of  ll„-  Profritv  //i. 
I.OTvlon,  1S15.      (J.  ],.  S. 

-  ('/.  c;/.,  p.  21.  "Jt  is  not  in  the  smillc^t  <Iexrcc  to  he  won-lcre.l  .tI,"  said 
Ruse,  in  anuthir  passa>;e,  "tl}at  when  a  numerous  assernljly  i.t^  prr^  ris  .,(  all 
(Iccriptiuni  were  askcl  whether  they  iksircil  t..  Ik-  relirv.'il  fr..ni  :i  Iv  ,ivv  .  Mti- 
trihution,  without  r.  Mih^litule  for  it  l.ein;;  inrnlionel,  everv  Imnd  -lioiill  1,,.  hi'Ll 
no  in  the  ,vtTirn!.!ti\e;  Imt  it  may  rea^  .naMy  !h:  .|..u!,te,l  «h.  ll,.  ,  a  veiy  d.diT 
tnt  sensation  nii^lu  not  havt  preiaih-.j  at  such  meelin){s,  il  tli,  parti,  s  present 
had  been  aware  that  an  immensely  proijji tiv  ta\  ccniM  not  m  the  present  stale 
of  the  rountry  l.<;  given  u|>,  without  some  other  In  avy  irnpoMlions  to  a  very  jjreat 
am-;;!,'  K^;..^  ,,.!_;:, ^^^i  i,;^^y,^,\.^  j;^  pja^^.^'  _  y^;_  ,,,-_  ,.   ^ 

"  O/.  <u.,    pp.  22-23. 


I  lO 


The  Income  Tax 


that  the  proper  objects  of  taxation  were  articles  of  luxury  and 
"  matters  of  that  kind  because  they  limited  themselves."  ' 

When  the  battle  of  Waterloo  finally  assured  peace,  every 
one  supposed  that  the  government  would  now  abandon  the 
tax.  Vansittart,  however,  had  been  much  influenced  by  the 
arguments  of  Rose,  and  at  the  opening  of  the  next  parlia- 
ment in  February,  i8i6,  proposed  the  retention  of  the  tax 
for  a  few  years  at  least,  although  at  half  rates.*  This  gave 
the  signal  for  a  storm  of  opposition.  It  seemed  a  golden 
opportunity  to  the  business  classes,  and  petition  upon  peti- 
tion poured  in  on  parliament,  praying  for  the  repeal  of  the 
tax.  At  one  of  the  county  meetings  a  supporter  of  the  peti- 
tion for  repeal  characterized  the  duty  as  a  "pistol  tax.'"  ^ 
The  merchants  of  London,  as  usual,  took  the  lead  in  the  op- 
position, the  Court  of  Common  Council  unanimously  adopting 
resolutions  that  "  it  was  not  necessary  to  enumerate  the 
grievrnccs  resulting  from  it,  and  that  the  taxes  had  become 
altogether  insupportable."  They  added  that  "  the  manner  in 
which  the  tax  is  carried  into  execution  (by  means  of  an 
odious,  arbitrary,  and  detestable  inquisition  into  the  most 
private  concerns  and  circumstances  of  individuals)  is  still 
more  vexatious,  unjust,  and  oppressive;  hostile  to  every 
sense  of  freedom,  revolting  to  the  feelings  of  Englishmen, 
and  repugnant  to  the  principles  of  the  British  Constitution." 
They  declared  "their  abhorrence  of  the  measure,"  and  re- 
solved that  "  to  adopt  the  tax,  upon  a  reduced  scale,  would 
be  to  make  a  fatal  inroad  upon  the  Constitution  and  would 
lead  to  the  subversion  of  the  Rights  and  Liberties  of  the 
People."  *  The  Court  was  followed  by  a  Common  Hall  of 
the  Livery  which  resolved  "  that  to  attempt  a  renewal  of  a 
tax  so  oppressive  and  uncon.stitutional  "  would  be  "  highly 
irritating  to  a  loyal  and  generous  TeopV,  and  calculated  to 

'  Hansaril,  vol.  xxxi,  p.  242. 

^  Ilansarii,  veil,  xxxii,  pp.  376  et  sfq. 

"  T<ixfs  on  Beer  and  Wine.  15y  Willi,  .n  Cohbett.  London,  n.  d.  [1863], 
p.  2?. 

•  The  Rfsoluti.ins  arc  printed  in  full  on  p.  20  of  the  pamphlet  entitled  Ktsiit 
or  he  KuineJ,  mentioned  on  the  next  page. 


The  War  Income  Tax,  ijg8~iSi6 


III 


produce  consequences  of  the  most  alarming  nature."  '  One 
of  the  members  of  parliament,  by  the  name  of  Grant,  stated 
that  the  bare  introduction  of  its  name  was  "  insuitiuf;  to  the 
sense  and  feelings  of  the  nation."  The  general  sentiments 
of  the  opposition  are  illu-stratcd  in  a  violent  es.say  of  Glover, 
a  clergyman,  who  put  the  ordinary  objection.s  in  grandilocpiont 
terms.^and  who,  after  declaring  that  "  we  have  no  superfluity 
of  property,  whether  public  or  private,  to  be  idly  sported 
with,"  concluded  that  it  is  "inconsistent  with  all  our  best 
notions  of  the  princijjles  of  legislation,  and  deficient  in  every 
essential  property  of  a  ta.v  suited  to  a  free  government ;  that 
it  is  arbitrary  and  unlimited  in  principle,  partial  and  unjust  in 
operation,  destructive  of  agriculture,  and  ruinous  to  com- 
merce; that  it  saps  the  foundation  of  public  virtue,  and  com- 
mits the  most  horrible  havoc  u{)on  public  morals."-''  A  widely 
circulated  pamphlet  bore  a  title  beginning  with  the  words, 
"  Resist  or  be  Ruined,'  and  was  filled  with  the  most  extreme 
statements.* 

The  agitation  throughout  the  country  was  fomented  by 
the  opposition  in  every  conceivable  way.  The  Mini.stry 
regarded  it  as  a  mere  political  manojuvre,  and  endeavored 

1  thid.,  p.  -f). 

'"  Credit  and  mutual  confuk'nce  are  the  great  liases  of  conimircial  inter- 
course. .  .  .  With  uncerenior.icius  intrusion,  the  incunu-  tax  viulatts  and  invadis 
every  one  uf  these  stamina,  and.wliile  it  tempts  on  one  hand  the  ruineil  liankrupt 
to  make  a  show  of  profits  and  of  income  whirh  h'.-  docs  not  possess,  and  afl'ords 
him  a  frienilly  screen  fur  his  frauds  and  liis  imposture,  it  pries  with  ini|uisiIorial 
eye  into  the  concerns  of  the  honest  an  1  substantial  trailer,  ami  evposis  the  chan- 
nels of  his  trade."  —  '/'/wiii;Hls  on  Ihf  Character  uml  Tetnlnny  of  Ihe  l'rof>erlv  J'li.x, 
lis  adaplni  to  a  Ptrmnnent  Sy^tfm  of  Taxntion,  Hy  the  Kev.  (ieorge  (Hover. 
London,  1816,  2d  ed.,  p.  564.     The  lirst  edition  ajipeared  in  the  I'lHiifhleleer, 

"  Op.  lit.,  p.  566.  The  author's  erudition  may  \,^  inferred  from  his  statement 
<m  p.  564  that  "  Florence  uas  a  free  republic,  and  I  rcmrnilier  no  traces  of  an 
income  tax." 

*  The  full  title  of  this  pamphlet  is  A'ni't  or  he  Kuined !  'I'!  I  ropertv  'l\ix 
must  be  nbolisheil  no-.v,  or  ii  Stale  /ni/iiiitioit  will  be  edablis/ieil  in  l.m^laiui  for 
ever.  The  immeJiate  NeshUime  of  the  whole  Xalion  she-wn  to  be  the  only  Means 
of  alerting  an  /m/uiiitorial  and  Perpeliial  Imome  Tax,  from  irhiih  Mr.  I'm- 
siltar!  .has.  ds'c'.ared  an  CI::.',  of  S.ri.'ifl:'  rriU  be  rxe>f:*te..'.  ll'nh  ::  fat!  .l.-ruunt  .1'' 
tlie  Proceeding!  in  I ondon.     London,  1816. 


112 


The  Income   Tax 


! 


:li> 


•\\ 


M 


to  expedite  the  decision  of  the  matter.    On  March  5  Vansittart 
explained  in  detail  the  various  modifications  which  he  proposed 
to  introduce  in  order  to  render  the  bill  more  palatable.'    The 
opposition,  noi  ever,  saw  their  opportunity  in  delay ;  for  the 
longer  the  decision  could  be  postponed,  the  greater  the  chances 
of  their   fanning   the   flames   of   discontent.      Accordingly, 
the  speeches  in  parliament  became  interminable,  Urougham 
calling  it  the  "most  tormenting  of  all  taxes."      Lord  John 
Russell  said  that  "  there  could  be  no  more  dreadful  calamity 
for  this  country  than  its  continuance."     Tierney  maintained 
that,  "if  the  people  of  England  would  submit  to  bear  half  of 
it,  they  were  fully  entitled  to  be  saddled  with  the  whole." 
One  speaker  characterized  it  as  "that  detestable  and  shame- 
ful tax";  another  as  an  "abominable  measure."     Meetings 
of  protest  throughout  the  country  were  multiplied.     Petitions 
to  parliament  poured  in  by  the  thousands,  and  it  is  said  that 
it  took  six  weeks  simply  to  rece've  and  classify  them.      So 
fierce  was  the  clamor  of  opposition  that  the  newspapers  dis- 
cussed what  m-ght  be  done  to  prevent  the  further  execution 
of  the  law  in  case  the  government  should  succeed  in  continu- 
ing the  tax.     Some  even  proposed  an  outright  refusal  to  pay, 
on   the   ground   that  if   this  refusal  became   universal,  the 
government  would  be  rendered  impotent.     The  Ministry,  on 
the  other  hand,  contended  that  all  this  agitation  was  being 
artificially  engendered  by  the  opposition  ;  that  in  reality  the 
country  was  not  opposed   to  the   tax  ;    that   they  were  not 
guilty  of  betrayal  of  promise,  since  every  parliament  had  a 
perfect  right  to  continue  any  tax  it  .saw  fit.     Above  all,  they 
maintained  that  the  excitement  was  due  to  the  machinations 
of  a  few  wealthy  individuals  who  desired  to  escape  their  fair 
share  of  taxation. 

Up  to  the  last  moment  the  fate  of  the  bill  remained  in 
doubt.  The  government  had  counted  upon  a  ma  jrity,  and 
the  oj)posicion  had  .loped  at  best  for  only  a  hare  victory. 
When  the  bill  finally  came  to  a  vote  in  parliament  on  March 
18,  1816,  after  a  mo.st  exciting  debate.  Lord   Brougham,  the 


The   ll'ar  Income   Tax,  t;Q.s  iSio 


". ^ 


leader  of  the  tjppo.sition,  contented  himself  witli  le.ulin^;  in 
impressive  tones  the  worchii^'  ol  the  Uiw  :  "  lie  it  en.ieled 
that  this  ait  shall  continue  in  lone  during;  the  present 
war  and  until  April  6th  next  and  after  tiie  detiiiile  siJ;nin^; 
of  a  treaty  of  peace,  ii»if  no  /oiii;i>:"  "  Tiie  shunts  wiiii  h 
these  three  wortis  raised,"  says  Lord  Hrnii);li;uM,  in  his 
autobiography,  "1  shall  never  loi>;et.  We  dividfd  itnmedi 
ately  and  threw  out  tiic  hill.  "  The  motion  to  retain  the 
tax  was  deteated  by  the  coni|)aratively  nanow  majority  of 
thirty-seven,  and  the  result,  we  are  told,  "w.is  declared 
amidst  the  gre.itcst  t  hecrui^  and  the  loudest  exultation 
ever  witiiesseil  within  the  halls  of  the  I'.nvjish  Senate."  ' 
Hrougham  thereuijon  mnvcd  that  all  the  re(  ords  ol  the  tax 
he  destroyed,  and  the  motion  was  adopted  hy  an  overwhelm 
ing  majority. 

Thus  came  to  an  end  I'aigland's  first  attempt  to  introduce 
the  income  tax,  and  thus  by  a  slight  majority  and  by  dint  of 
a  most  skilfully  conducted  political  t  ampaign  did  pitiliameiit 
set  its  seal  of  disa|)|)roval  on  the  ])roject  of  making  the  tax  a 
permanent  part  ot  the  fiscal  system. 

When  we  reflect  that  the  agitation  both  in  jjarliament  and 
throughout  the  country  had  been  carried  on  with  the  utmost 
adroitness,  and  even  iniscrupulousness ;  whitn  we  remcnd)er 
that  every  effort  had  been  made  to  fan  the  flami;s  of  preju- 
dice and  of  discontent;  when,  finally,  we  note  the  dis.idvan 
tages  under  which  every  government  necessarily  labors  when 
it  proposes  to  continue,  in  time  of  peaic,  a  tax  that  is  ex- 
pressly granted  only  for  a  period  of  war,  -when  we  Ix-ar  in 
mind  all  these  considerations,  it  is  otdy  a  fair  intricud;  to 
conclude  that  so  slight  :i  niaiority,  attained  in  su(  h  a  way,  in 
favor  of  the  repeal  of  the  t  is,  did  not  re.illy  represent  tin- 
well-considered  opinion  of  the  gri:at  mass  of  the   public.      It 


'  7ht  !/i'./y>y  ,/  t/:f  Taxoti'^n  <f  /  iirl'iii/.  I!'.-  Vvilli.-uri  I  .-lyli  r.  I.'.n-luii, 
iSj;,  p.  -{.  1  i.n  !h-  -.1:111  llansafl  -..i;^:  "  .\s  s'j.,n  ;.■,  ilir  nini'.'iH  wrri- 
ann'-un.  nl  in  t!i-:  If  mi-.  ,  a  I  .:i'l  i  h.  ■  rin;;  t-..!;  |.I.i' <:  wtnh  l.i-.t''l  f..r  ■<•  vrr.i! 
lli:niil'->.  Siiiiilrir  rvull.il  .11  « ;i-.  iii.ijif'-^t'  1  l.y  iti':  ir'.A'l  cf  strain;' ti  in  llir 
i'lh! i\  an't  Ol*:  avenues  <.a  ttic  H-ju^c.  ' 
I 


114 


The  Income  Tax 


was  in  reality  only  a  victory  of  parliamentary  strategy.     But 
after  all  it  was  a  victory. 

Those,  however,  who  hoped  that  a  final  quietus  had  been 
put  on  what  they  affected  to  consider  a  hateful  impost  were 
doomed  to  disappointment.  The  sentiment  in  favor  of  an 
income  tax,  in  fact,  never  completely  died  out,  and  scarcely 
more  than  a  quarter  of  a  century  was  to  elapse  before  the 
tax  was  to  be  reim  posed,  and  that,  too,  as  history  was  to  show, 
in  a  permanent  form. 


.<! 


f  X 


Al'I'KNDIX 


TiiK  I'Kiii)r(i:  OK   iiii    Inmimi.  Tax. 


;S    iSlt 


1798 

"779 
1800 
1801 
1802 
1 80  J 
1804 
1805 
1806 
1807 
1808 
1809 
1810 
1811 
1813 
1813 
1814 
1815 


f'.04(i.(c4 
'■-:44-4.V^ 


5-34 1. 907 
4.111.9J4 

l-".Mjj.oi;6 
i?.48^.294 

14.453-.3-0 
i4.4^'2.776 

15.488.546 
I5.795.^><;l 
14.188,037 
1 5.642.338 


'  €/.  Keporl  of  Ih;  Commissioners  of  the  [uLiiiJ  l\,:ifiuf,  1.S70,  vi.l.  ii,  Ap|iin- 
<lix,  p.  184, 


{•|i,\rri.K  11 


i\\ 


Till'.   I\(()Mi:    Vw  n\    Tkiai,    lH\2    lSf>2 

§  I.    '/■//<•  liitin<il,  /.I.      /,V?.' 

N'dTWiiiisTAM'iMi  the  tctliktioii  (if  c\])cn(litiirc  to  x  peace 
fuDtinji,  tlio  ifpo.il  ol  tlic  iiuoiiic  tax  Id  I  a  f;.ip  in  the 
revenues  which  it  became  necessary  to  mai\e  (^ooil  l)y  im- 
posing new  taxes.  As  Rose  had  predicteil,  liie  ^reat  mass 
of  these  new  revenues  consisteil  in  burdensome  iiuiirect  taxes, 
and  before  lon^  lCnj;land  was  j^roanini;  imder  a  heavy  load. 
The  situation  as  it  existed  in  the  year  1S20  is  well  portrayed 
in  the  familiar  description  by  Sydney  Smith,  in  an  article 
in  the  Eilinhiinrit  Rcriiio  of  that  yea/.  "  We  can  inform 
lirother  Jonathan  what  is  the  inevitable  consecpience  of 
being  too  fond  of  ;;lory.  Taxes  upon  every  article  which 
enters  into  the  mouth  or  covers  the  ''■ick  or  is  placed  under 
the  foot.  Taxes  upon  everything  wh^n  it  is  pleasant  to  .see, 
hear,  feel,  smell  or  taste.  Taxes  upon  warmth,  li^ht  and 
locomotion.  Taxes  on  ever\thing  on  earth  or  under  the 
earth,  on  everything  that  comes  fiom  abroad  or  is  grown 
at  home.  Taxes  on  the  raw  material,  taxes  on  every  fresh 
value  that  is  added  to  it  by  the  indi  stry  of  man.  Taxes  on 
the  sauces  which  p.imper  man's  ajjpetite  and  tlie  drug  which 
restores  him  to  health  ;  .1  the  ermine  which  decorates  the 
judge,  and  the  rope  which  hangs  the  criminal ;  on  the  poor 
man's  salt  and  the  rich  man's  sj)ice  ;  on  the  brass  nails  of 
the  coffin  and  the  ribbons  of  the  bride ;  at  bed  or  board, 
couchant  or  levant,  we  must  |  ly.  The  schoolboy  whips  his 
taxed  top;  the  beardless  youth  manages  his  taxed  horse  with 
a  taxed  bridle,  on  a  taxed  rmd.  and  the  dving  Ivnglishman, 
l)nuring  his  medicine,  which  has  paid  seven  per  cent,  into  a 
spoon  whicii   iias  i)aiil    tlfleen   per  cent,  flings  himself  back 

116 


T/i,'  Jino!:ic    7,1  X-  on    7'n,i/,   iSjj  i.Sftj         uj 

upon  .1  clii.  '.  lud,  win,  li  lias  |.iii«l  t went) -two  por  .fiit,  .uul 
expires  in  the  arms  ol  an  apuiluraiy  who  lias  p.iiii  a  license 
()f  one  hiuulred  |)oun.is  tor  the  privik'ne  of  \n\\[m^  him  to 
death.  Ills  whole  property  is  then  immediately  taxed  from 
two  to  ten  per  cent,  besides  tlu-  pn.hale  judf^es  fees  demanded 
for  hnryin-  him  in  the  rhancel ;  his  virtues  are  handed  down 
to  posterity  on  taxed  maihle.  and  he  will  then  be  Kalliercd  to 
his  fathers  to  be  taxed  no  mure." 

Few,  however,  ventured  to  su;':^'est  a  return  to  the  old  sys 
tem.  Wilkinson,  it  is  true,  wn.te  in  i«^>u  a  work  designed 
to  prove  that  "the  present  fiseal  system  eomi)els  the  labourer, 
a  dwarf  in  wealth,  to  earry  the  load  of  iho  l„rd,  who  is  a 
Kiant  in  allluence " ;  and  he  implored  the  K"\ernment  to 
"e.\press  the  taxes  out  of  the  aeeunndated  wealth  of  the 
country,  and  not  out  of  the  blood  and  sinews  ,ind  bones  of  a 
«ievoted  and  indefatis^able  |)eople.' '  Wilkin.son  laid  down 
the  Kcneral  principle  th.it  "however  |)rejudiee,  interest,  and 
sophistry  may  decide,  it  is  contended  that  p^  .porty  is  the 
only  le^^itimate  source  of  ta.xation  :  all  the  subterfuKcs  of 
chicane  and  Jesuitism  ou«ht  never  to  cloud  over  this  im 
portant  fact."-  ilis  was,  however,  a  voice  in  the  wilderness. 
It  was  not  until  about  i  '':-cade  later  that  any  roal  interest 
was  manifested  in  the  sui)ject. 

Toward  the  end  of  the  twenties  and  the  beKinnin^  of  the 
thirties  the  agitation  for  a  chan;,^e  in  the  system  of  taxation 
became  more  marked.  ;ind  reflected  it.self  not  only  in  parlia- 
mentary discussion,  but  in  a  considera!)lc  literature.     At  first 

'  /"//<■  I'rinciple  of  an  I'/uitthlf  an,t  /■ffi.iriit  Svil.m  of  /imiii.r:  /•,.««,/,,/ 
«/i';/  ull-.-.uieiil,  uiir.  <•! -..il  ,iii,/  iii:,,n,i/'li-  I'linafla,  ,,ip,il>l,-  0/  iiimiiiiJiinj; 
'/ ii.vfs  anJ  /',.,././;',;/,,■  ri--i:,,i^  aii.t  /'trmantnlly  .uffotlnn^  .l/^n,  uUiii ,, 
Ti;i,/f,  Commrrir.  H'ciM.  anJ  t/af-piitf^^.  l>imon>h.ilin);  l/iut  Ikf  rttfliiii; 
Sysffm  of  /■iH.iine  is  Ctfiianiis,  Imfohlic  ami  /iiif>  ovi.ioi/ ;  liiiurioui  to 
liherty.  I'roftily,  an./  1  ferial,,  n  :  I'rming  the  Xe,e'<iity  of  refra/itt^-  alt  rxnl- 
inc  laxtu  hotn  Ctufral  ami  I wnl :  ami  atlo flint;  Our,  Stwfir,  f-'f/iiifiil'h,  n»,l 
Efiieunl.  groumM  ufon  a  S.al,-  /u  /,  Ifi.f  ,;«,/  I  n./iam'fa/.lr.  Hv  /'.f  lilnf/ion 
e/t/iis  /'Ian  thf  DreaJ  of  Ihe  h'l.li  uvui,!  ff  rtmove.l,  llit  liihrt.  0/  Hit  I'oui  if- 
lirfd,   an.l  Ihr    Contiihnct   0/  Mil  /-r,/,./,,/,    tl, .,    t,, .      |lv    1  la      ,   .1    WilUitisoii. 

l.Onrllin.     I  S-Ml,    I.Ti      \,    >1_ 

''  C'f.  ill..  \>.  \:i. 


iiS 


The  Income   Tax 


the  rcforniors  cast  about  for  soir.o  otlicr  substitute.  Thus 
the  author  of  an  interesting  publication,  who  was  bitterly 
opposed  to  the  whole  existing  system  of  indirect  taxes,  sug- 
gested that  it  be  replaced  by  a  general  tax  on  houses.  This, 
he  thought,  would  be  an  inestimable  boon  to  the  public, 
while  as  a  consequence  of  its  great  yield,  even  the  "poor 
rates  would  tumble  down  like  an  ill-bui't  and  unseemly  edifice, 
and  all  would  slide  on  with  tranquillity  and  ease  into  increas- 
ing prosjierity."  '  Gradually,  however,  the  reversion  to  the 
original  idea  became  more  pronounced,  and  some  writers 
proposed  an  income  tax,  others  suggested  a  property  tax, 
and  some  even  advocated  a  graduated  property  or  income 
tax. 

■n  Parliament,  Iluskisson,  speaking  on  ^. arch  i8,  1830,00 
the  subject  of  the  general  distress,  recommended  a  repeal  of 
the  inr-st  grievous  indirect  taxes,  and  suggested  in  their  stead 
"p  direct  tax  upon  property,  limited  to  capital  not  directly 
employeci  in  the  pursuits  of  industry."  ^  A  few  days  later,  a 
general  debate  was  precipitated  by  Poulett  Thomson  who,  in 
making  an  unsuccessful  motion  for  a  committee  on  taxation  a 
week  later,  declared  him.self  in  principle  at  least  in  favoi 
of  a  property  tax.  Referring  to  Huskisson's  speech,  he  an- 
nounced his  entire  agreement  with  the  proposal,^  although, 
to  use  the  words  of  an  eminent  successor,  he  was  "cautious 
and  even  t'niid  in  suggesting  the  idea"  ;  and  while  "avowing 
his  own  di'-position  to  adopt  it,"  took  "care  to  disclaim  it  as 

'  T'iohJ:/.  oil  'f,i\,it!,>ii.  Dc/iiii/eJ  -i>ith  the  most  />io'''uiil  Keipfcl  to  Hit 
Ki.;hl  1 1. -HOI  ,:'!,■  Ill,-  .S/',.ii;->-  ,iii,i  (ient/emen  of  t!u-  Comnoii.  House  of  Parlia- 
ment.    1,1111. Ion,  1S27,  pp.  I),  j;. 

-  ll.uis.inl,  viil.  wiii,  ini.  i04-6nri. 

•'  'M  III  the  <|iusti  .11  .,f  A  tjriMt  mutation  nf  t.ixation,  and  the  substitution  of  a 
direct  v.\  \ipiiii  inr.iiiic  for  a  largo  portion  of  our  indirect  taxes,  I  think  it  hut  just 
to  nivsill,  mid  hut  fair  to  the  House  to  declare  my  concurrence  in  the  view  he 
taltes  upon  tlie  suKjeet.  I  aj^ree  «it!i  liim  in  thinking  that  under  proper  regula- 
tims  and  with  sutiuiLMt  securities,  such  a  change  would  he  beneficial  in  the 
highest  degree  to  the  industry  an<l  improvement  of  the  country."  He  added, 
howi'ver,  "that  as  a  considerr lion  of  this  'lue^li.!,.  'id  not  form  a  part  of  the 
moli.in  fir  a  connniitee  he  would  not  discuss  it  ari\  rat 'his  time." — Speech 

nf  Marih  .'5,  iS;o,  in  Hansard,  vul.  wiii,  p.  876, 


■*■ 


The  Income   Tax  on   Trial,  1842-1862        119 

an  essential  part  of  his  plan."  '     Even   Lord  Althorp,  who 
admitte'l  his  inconsistency,  dcclarod  that,  in  liis  opini(jn,  to 
red':(  ,;      .xcs  nnd  to   "impose  a    property  tax   to  meet   the 
defciciicy  tha-;  occ  isioned,  vouid  be  a  very  ^ood  measure." - 
Th      s  ron;;e,st    advocate  of   the    scheme,   however,  was    Sir 
He.!,-y    i'arncll.     Parneil     had     hoped    to    bri.ij;   the    whole 
matter  betor-.-  me  Finance   Committee   appointed  o^  his  in- 
stance in   1828.     Kut  the  committee  was   discontin-  jd,  and 
Parneli,  as  a  consequence,  published  his  views  in      weighty 
and  influential  volume.     In  the  debate  in   1830  he  .  >i>ented 
himself  with  sayinj;  that  "  he  should  have  no  objection  to  a 
modified  property  ta.x."  ^     In  his  book  on  the  general  subject 
of  fiscal  reform,  he  took  lar  stronger  ground.     Maintaining 
that  bad  taxes  could  not  be  repealed  without  a  suitable  sub- 
stitute being  found,  he  pointed  out  that  in  the  cho-'ce  of  this 
subsfitute  there  wr     no  doubt  in  bis  own  mind.     "  In  select- 
ing 'X  new  tax,"  he  tells  us,  "there  seems  to  be  but  one  opin- 
ion with  respect  to  what  tax  that  ought  to  be.      Persons  who 
hold  the  most  opposite  doctrines  on  the  si?l)ject  of  our  finan- 
cial,  commercial  and   agricultural   difficulties,   in   suggesting 
remedies,  make  an  income  tax  a  part  of  them."^     Parneli  did 
not  go  into  detail,  but  contented  himself  with  suggesting  a  rate 
of  one  and  one-half  or  two  per  cent,  which  he  thought  would 
probably  yield  three  millions  sterling  a  year,  as  opposed  to 
the  ten  per  cent  tax  which  in  181 5  yielded  fifteen  millions. 

Parliament,  however,  was  not  ready  for  such  a  step  and  as 
the  proposition  was  vigorously  opposed  by  Lonl  Palmerston 
and  Baring,  nothing  came  of  it.  Much  interest,  nevertheless, 
was  aroused  in  the  public  mind,  and  the  discussion  of  the 
subject  became  quite  general.  Even  before  the  parliamentary 
episode,  Matson  had  maintained  that  the  substitution  of  a 
general  income  tax,  in  lieu  of  all  the  existing  indirect  taxes, 

'  T-i'tnty  Years  of  Finaini.il  Poliv.  ,t  Sitnu/tary  ,./' ///,•  Ciii.f  /'hiiintial 
Afeasures  pusseJ  hetu<fen  1S4J  ,111,/  1S6/,  wi/i'i  ,t  Table  v;  BuJ^eti.  l!y  Sir 
Stafford  II.  NorthcDtc.     Loiiili>n,  iSii2,  p.  24. 

'  Hansar.l,  vol.  xxiii,  y.  90S.  s  //,,,/_  .,  ,,,,_ 

On  t!a,-nii:i'  I\rJ\--:.     b'y  Sir  Henry  rarr.ii'..     i.,ini;.jii,  iSjO,  (..  iO/. 


I20 


The  Income  Tax 


\'- 


would  be  of  the  greatest  advantage  to  the  public'  After 
Parncll's  statement  the  advocacy  of  the  scheme  became 
more  pronounced.  The  author  of  a  work  which  ran  through 
several  editions  laid  down  his  general  principles  in  the 
following  words:  "This  is  my  panacea — and  for  it  I  claim 
no  originality,  except,  perhaps,  in  the  details  —  *:o  relieve 
from  every  description  of  impost,  all  creating  means  of 
wealth,  and  to  supply  the  deficiency  by  levying  taxes  on  created 
wealth  alone." ^  He  called  his  scheme  one  for  an  "income 
and  property  tax,"  in  order  to  mark  the  necessity  of  taxing 
incomes  from  labor  at  a  lower  rate  than  those  from  property.-'' 
Entering  rather  fully  into  the  alleged  shortcomings  of  the  tax, 
he  said  :  "  If  I  be  told  that  the  property  or  income  tax  has 
been  scouted  by  the  people  of  England  as  '  inquisitorial,' 
'  oppressive,'  and '  unconstitutional,'  I  should  like  to  ask  what 
ta.x,  amounting  to  fifteen  millions  a  year,  would  not  have  had 
as  nK.-iy  hard  names  levelled  against  it,  if  their  mere  utterance 
would  remove  the  grievance."*  In  conclusion  the  author 
maintamcd  that  the  real  opposition  to  the  tax  came  from  the 
"  leviathans  of  WL.ilth."  ° 

Another  writer,  w^io  called  attention  to  the  moral  evils 
of  the  excise  and  the  customs,  stated  that  he  preferred  on 
the  whole  a  property  tax,  holding  to  the  naive  belief  ihat 
perjury  would  be  less  likely  than  in  the  income  tax.''     He 

'  Kipeti]  oj till  Ta.xes  -.i-tth  .u-tiirilv  lo  the  Fuiul  IliUlcr,  in  a  I,tt/r.  shru'ing 
iihc  th,-  !Jreitl  A,l-,iuil.it^(s  h  /!ie  ljnt:/-0;vufr  diu/  cill  i^lhrr  Chines  ,\f  lii^  Mai- 
e'ly's  Suhjerls.  AM' esse,f  lo  t/if  I'tuke  of  Welhni^cn.  liy  Jolin  Matsuti.  I.utnlcin, 
n.  il.  [1829].     SfC  esp.  pp.  J,  10,  II. 

-A  I  ettt-r  lo  lilt  hill  I  .'/  ll'il/un  <>n  Ihf  Co»iiinil:ilu-'ii  of  c.xisliii^  'I\ixcs  for 
a  GraditiileJ  I'lofirly  ,iii,i  //;<.«/,■  7  ,)\  .  ,  oniir,  Ittis;  l!i,r,:oil'i  <i  IV.iii  of  Pitr- 
luimentary  Reform,  lly  an  Kngli'^hniaii.  Innilun,  1S30,  2(1  c^l  ,  p.  5.  T'.ie 
author  tells  us  that  after  writing  these  words  ho  ascertaincil  that  the  same  itlea 
had  been  propoumleii  by  Uailnal  in  his  I.eller  lo  Ihe  l.orJs  aiiJ  Commons,  iSjo, 
p.  177. 

■'  Of.  ,it.,  p.  17.  *  Of.  nl.,  p.  16.  "  Of.  oil.,  p.  2S. 

'  "  Withdut  cntt-rtaining  the  highest  opinion  (if  the  moral  or  religious  feeling 
(if  the  present  date,  it  nally  were  ditiicult  to  believe  it  so  wholly  lost  that  a  man 
wiiuld  sit  down  e()(jlly  and  deliberately,  and  call  on  the  .\lniightv  to  aid  him  in 
su(  h  fraud." — Properly  {not  hnome)  l/ie  only  fn.\l  Croiin.f  of  'I a.xation. 
n.  (1.  L^»3lJ,  p.  4. 


•fFHT. 


■  I/' 


The  Income  Tax  on    Trial,  1842-1862         121 

was,   however,   bitterly  opposed  to  the  idea  of  progressive 
taxation.* 

Buckingham,  on  the  contrary,  advocated  a  g  aduated  prop- 
erty tax  on  the  general  principle  of  "  making  wealth  to  con- 
tribute largely  of  its  wealth  ;  permitting  moderate  competency 
to  contribute  moderate  support ;  and  'eaving  poverty  entirely 
free."  2     i^  order,  however,  to  avoid  the  chief  difficulty  of 
assessment,   Huckingham   suggested   a  graduation   by   rank, 
carrying  out  his  rather  absurd  scheme  to  the  minutest  detail.^ 
Another  writer  of  the  following  year  suggested  a  graduation 
directly  by   property  rather   than    by  rank.-*     Still   another 
author,   who   waxed     indignant   at   the   e.xisting   system   by 
means  of  which  "a  vast  number    jf  the  people,  who  exist 
in  comparatively  easy  circumstances,  are  allowed  to  ti-cape 
from  the  obHgation   of   bearing  a  just  share  of  the  public 
burthens  ;  and  the  helpless  indigent,  who  ought  to  be  wholly 
removed  from  the  reach  of  taxation,  are,  injuriously  for  the 
general  interests,  absurdly  comprehended  in  the  class  of  tax- 
contributors,"   suggested   what  he    called  a   population  tax, 
which,  as  he  proceeded  to  explain,  turned  out  to  be  really 
a  combination  of  a  poll  and  an  income  tax.^     A  writer  who 
signed  himself  "  A  Capitalist,"  disclosed  his  sympathies  by 
suggesting  a  tax  on  all  lands  and  professional  profits,  leav- 
ing trade   and  industi)    free."^    Finally,  an  author  who  dis- 

'  "The  idea  of  a  graduateil  property  tax  is  absurd;   it  looks  too  much  like  a 
vulgar  and  invidious  attack   ..n  tlie  rich.      Is  it  a  crime  to  he  rich?     If  so,  stop 
the  avenues  to  wtaltli  and  turn  industry  and  talent  from  their  course." —  Op.  cit 
p.  6. 

-  Outlines  of  n  n,-,o  fiii</i;,-/,  for  nnsiiix'  P'.is;!!'^  Milliom,  by  means  of  a  justly 
CrnJimle,/  I'ropnty  I'.i.x,  With  Sui^eitions  on  the  representative  System,  the 
Xational  Deht,  cti.  I'repireJ  l\'r  the  <oii>ii/cr.ition  of  the  KeformeJ  Parliament 
of  EnglanJ.     liv  J.  S.  lUickinghani.     I.omlou,  iSjl,  p.  5. 

■'  See  the  tahlo  on  p.  8  01'  his  work. 

*  A  Scheme  for  n  Gratluate.l  I'rofertv  Tax.      London,  iSji. 

'  ^i»ggestions  for  Conthining  an  imficcl  System  of  Taxation,  with  a  wide 
Division  of  the  F.teetiie  /'raKchise.     London,  iS;!,  pp.  ?,  6-<). 

^  A  Prattical  Plan  for  the  Immediate  Annihilation  of  J  a  res,  awl  Equitahle 
/.i,/ii.<lation  0/  the  Xational  Debt.  IJy  a  Capitalist.  London,  1832,  2d  ed., 
p.  y. 


122 


The  Income   Ta.\ 


cussed  the  causes  of  "  tiie  unusual  and  generally  prevalent 
do|)iessi()ii  and  distress,  "  found  the  secret  to  consist  in  the 
system  of  taxation,  of  which  "the  consequences  are  such  as 
mif;ht  be  fairly  calculated  upon  —  the  impoverishment  of  the 
lower  classes,  and  the  accumulation  of  wealth,  in  masses, 
anionLjst  the  aristocracy."  '  He  maintained  that  "  the  antidote 
to  this  j;laring  injustice  is  the  substitution  of  an  equal  property 
tax  surficicnt  for  the  exigencies  of  the  State,  in  lieu  of  all  ex- 
isting taxes."  In  reality,  his  .icheme  was  a  combination  of  a 
property  and  an  income  tax,  and  when  he  came  to  discuss 
the  objection  on  account  of  its  "inquisitorial  tendency,"  he 
concluded  that  "  the  good  effect  resulting  from  every  indi- 
vidual examining  the  real  state  of  his  affairs  annually,  would 
overbalance  the  obnoxious  nature  of  the  enquiry,  and  would 
prove  a  most  salutary  measure  to  the  commercial  interest."  ^ 


f 


I 


§  2.    Tlic  Umrst,  i?^2~iS<^2 

The  political  revolution  of  1832  could  not  fail  to  turn  public 
attention  to  the  fiscal  question.  In  this  discussion  the  income 
tax  at  first  played  a  considerable  role.  In  the  year  1833,  the 
question  of  a  graduated  property  tax  was  brought  up  in  par- 
liament by  Robinson,  who  moved  on  March  26  for  a  Select 
Committee  "  to  consider  and  revise  our  existing  taxation,  with 
a  view  to  the  repeal  of  those  burthens  which  prey  most  heavily 
on  productive  industry,  and  a  substitution  of  an  equitable 
property  tax  in  lieu  thereof."  This  led  to  a  warm  debate, 
in  the  course  of  which  Joseph  Hume  made  the  rather  star- 
tling statement  that  "all  taxes  are  confiscation,  and  the  only 
question  is,  which  is  the  least  oppressive  mode  of  confiscation." 
Lord  Althorj),  who,  as  we  know,  had  manifested  no  particular 
repugnance  to  the  income  tax  three  years  before,  now  opposed 
the  motion,  which,  nevertheless,  received  155  votes  in  favor, 
compared  to  231   against.     As  a  result,  a  veritable  flood  of 

'   The  I'rof'frty  'lax  :    •  only  ejffclu.il  Kerne Jy  for  the  present  Embarrassment 
of  the  Coiiii/ry.     l;iriiiingliaiii,  lSj2,  2d  cil,,  p.  4. 
-  *-^\  .„•.,  J,.  7. 


1TJ^    ^^^.^^M^^?^-:^^'-^-^rcv 


•^  ''?Vv 


7V/1'  Income   Tax  on    Trial,  1842-1862         123 

pamphlets  now  appeared.  Richardson  boldly  advocated  what 
he  called  "equalizing  taxation,  — /.t.,  throwing  off  from  the 
shoulders  of  the  poor,  the  weight  of  taxation  on  to  the 
shoulders  of  the  rich,  who  ought  to  bear  it."  *  A  fiery  appeal 
to  the  working  clas.ses  favored  a  similar  plan,  declaring  that 
"an  equitable  property  tax  .cans  a  property  ta.\,  t"  ,  per- 
centage of  which  shall  increase  with  the  amount  of  property 
taxed." 2  A  more  important  disputant  thought  that  the  new 
popular  control  of  parliament  would  render  it  possible  to  levy, 
at  all  events,  a  tax  on  permanent  income,  or  what  he  calls 
"realized  capital,"  in  lieu  of  the  corn  laws.^  He  objected, 
however,  to  a  graduated  tax  on  the  ground  that  "  any  distinc- 
tion between  different  classes  would  cause  much  confusion 
and  jealousy. "■«  Ileathfield,  in  a  temperate  essay,  discussed 
the  arguments  of  Toulett  Thomson  and  Lord  Althorp,  who 
were  now  opposed  to  Robinson's  motion,  declaring  himself  also 
in  favor  of  an  income  tax,  a'though  demurring  to  the  principle 
of  graduation.''  Pebrer,  a  Spimiard,  who  wrote  a  bulky  work 
on  I'^nglish  finance,  contented  himself  with  advocating  a  tax 
of  nine  and  one-fourth  per  cent  on  all  incomes  except  the 

'  Unequal  Taxation,  the  ,/ii,f'  I  \iuif  of  the  Misery  now  suffered  hv  the  indus- 
trious and  middle  Classes  of  So, u/y ;  and  its  l\emedy,a  Cradtiated  la.x  ufon 
Properly.  ?rd  ed.,  eonsideral'ly  enlar<-ed,  with  a  I'able  showing  the  Inequality  of 
Taxation.     I!y  Janus  Kich.irclsun.    l.undon,  1S3;,  j).  9. 

■•'  British  Taxes  Pisse-led.  Tei.ii;  a  I'tain  I  elter  addressed  to  the  M'orkingmen 
of  Great  Britain  and  Ireland:  ex/<la  i  >i  ntt,'  how  ff'ly  .Millions  are  yearly  raised, 
who  pay  these  fifty  .Millions  ;  i'io:o  t')--y  ought  to  he  r.-ise,l,  and  who  ought  to  fav 
them,  liy  One  of  the  Council  uf  t'lo  National  I'olitical  Lnion.  I.oml  jn,  |S',J, 
P-  13- 

'  "So  long  as  the  House  of  Commons  did  iu)t  truly  represent  the  feelings  of 
the  people,  and  men  of  property  and  rank  alone  had  the  control  of  Parliament,  it 
was  needless  to  hope  for  a  ta\  on  property  .  .  .  So  ol)no.\ious,  indeed,  was  the 
very  term  'property  tax,"  that  it  was  never  even  alluded  to  Imt  in  the  most  deli- 
cate manner.  Now,  however,  that  the  voice  of  the  people  is  heard,"  he  thinks 
the  matter  is  difl'erent.  —  Tax  on  Capital  and  Fixed  Duty  on  Corn.  London, 
'Sij.  PI'-  3.4-  *  Op.  ,it..  i>.  9. 

•"  Ooservatii^ns  oeeasioned  hy  the  .Motion  in  the  House  of  Commons  on  th-  jbth 
of  March,  iSj;,  iy  George  A'.  Robinson,  Fs./iiire.  for  a  Seleel  Committee,  etc. 
Addressed  to  the  landed  Proprietors  of  the  United  Kingdom.     Hy  Richard  Heath- 


iicld,  Accountant.     I.c 


melon,  1^33.  pp.  9,  12. 


I 


124 


T/ic  Income  Tax 


wages  of  labor ; '  while  Vaux  preferred  a  property  tax  on  all 
land  and  personal  property.  "  The  fund-holders,"  Vaux  sagely 
remarks,  "  cannot  bear  to  hear  a  property  tax  mentioned ; 
but  at  this  no  man  can  be  surprised,  who  reflects  that  it  is 
the  only  tax  whatever,  that  can  make  them  contribute  as  much 
as  others  to  the  necessities  of  the  state."^  Another  writer 
who  was  especially  interested  in  repealing  the  indirect  taxes, 
advocated  either  a  property  or  an  income  tax,  leaning,  how- 
ever, on  the  whole,  to  the  latter,  "  incomes  being  more  easily 
eptimated  than  property,  and  the  difference  between  a  property 
tax  and  an  income  tax  being  more  in  name  than  in  reality."^ 
Some  authors,  however,  like  Easton,  who  still  had  their  doubts 
as  to  the  advisability  of  an  income  tax,  were  content  to  renew 
the  old  recommendation  for  a  house  tax.* 

The  most  elaborate  attempt  to  advocate  the  income  tax 
was  made  in  a  large  volume  written  by  Benjamin  Saver,  an 
official  connected  with  the  original  income  tax."  Sayer  be- 
gins by  stating  that  he  "  is  anxious  to  be  understood  throu^'^h- 
out  his  attempt  in  the  comparative  sen.se  only,  not  as  deny- 
ing that  the  income  or  property  tax  is  attended  with  evils 
such  as  arise  from  other  taxes  in  general,  but  as  attributing 

1  Taxation.  K'e-.'nuf,  Exf-niJiluie,  /'ower,  S/afis/hs  ami  Peht  of  the  whole 
British  Empire  'llinr  Origin,  I'rogress  ami  I'reient  State,  tU.  Uy  I'alili) 
IVlircT.      I.dn.loii.  iS;;,  p.  5o(]. 

'^  Kelatt-e  Taxation:  or  C>i>ier;iitioin  on  the  Imfioluy  of  taxini^  Malt,  I  fops. 
Beer,  Soap,  Can,llts.  an.l  featlur  ;  with  a  ;  u-iv  of  the  A/anner  in  wliuh  the  f)uties 
impose.l  upon  tliem  affe.t  the  different  Kimh  of  f  an,l,  whether  m  Crass  or  Tillai;e, 
ami  their  constant  fendenty  to  nurease  /'ai4p,rism  :  -otth  Keasons  for  Suhsti- 
tiitinj,',!   fax  on  fr.p.rty,  ,  A  ,      !ly   IhoiiKis  \'.iii\.      I.nn.li.n,  iS;;,  p.  2jS. 

'  Outline  of  a  /'Ian  for  amenami^'  the  System  of  Tu.xation.  Hirmingham, 
183.,.  p.  .S, 

■*  .•/  I'lan  for  Coiiniiutin^ an,/  .li'O.'ishini;  faxes  on  the  \i\essaric;  of  /.,fe,  and 
All  the  assessed  /'axes,  to  t>'ie  .Iniount  0/  £j^,ooo.ooj  per  Jniiunt,  etc.  Hy  josiah 
Kastoii.      Tauiitiin,  1S53,  p.  ^. 

'  An  Attempt  to  sheiv  the  fitstue  and  flxpeJiemy  of  substitiitini; an  Income 
0-  I'roperty  /'ax  for  the  present  /'a.xfs,  or  a  part  ot  them  :  as  affording' th.'  most 
Kiiuital'Ie,  the  least  Injurious,  and  ( under  the  modified  Procedure  siii^esteil  therein ) 
the  least  Ohno.xious  Mode  of  Taxation  a/so,  the  most  lair,  Idiantageoif,  and 
Effectual  Plans  of  reducing;  the  Aational  Debt,     f  Hy  Hcnjamin  Saver.]     I^)n(lon, 


.imm^^^^sm.--w^}.mmm^!??^^ 


The  Income   Tax  on   Trial,  1^42-1862         125 

to  it  a  less  degree  only."  He  contrasts  the  existing  system 
of  taxation  —  both  the  indirect  taxes  on  expenditure  and  the 
direct  taxes  on  "use,"  like  the  land  taxes  and  the  assessed 
taxes  —  with  the  income  tax,  from  the  point  of  view  of  ab- 
stract theory,  of  administrative  procedur:,  and  of  what  he 
calls  "  excess  of  taxation  "  —  a  threefold  plicnonienon,  accord- 
ing as  it  involves  the  individual  giving  up  more  than  the 
treasury  receives,  or  more  than  his  industry  can  replp.ce,  or 
more  than  it  is  just  or  necessary  for  the  government  to  take. 
In  all  of  these  respects  Saver  gives  unqualified  preference  to 
the  income  tax. 

Discussing  the  chief  objection  attributed  to  it,  namely,  the 
exposure  of  private  affairs,  he  maintains  "that  persons  who 
do  not  carry  on  trade  speculatively,  but  prudently,  do  not 
dread  an  exposure  of  the  state  of  them."  '  And  he  sagely 
adds,  "  It  might  be  doubted  whether  the  feeling  Sf^ainst  pub- 
licity of  income  did  not  in  some  ca.ses  proceed  from  the  ap- 
prehen.sion  that  when  ta.vation  was  to  be  taken  from  income, 
publicity  would  prevent  or  disclose  that  eva.sion  which  there 
was  a  disposition  in  those  cases  to  commit."  '■^  Sayer  is  fully 
aware  of  the  general  feeling  against  the  tax,  due  largely  to 
the  preference  of  old  over  new  taxes,  liut  he  takes  occasion 
to  point  out  that  "  the  exci.se,  at  its  first  institution  and  long 
afterwards,  was  as  much  reprobated  as  the  income  tax  has 
been ;  and  considered  even  more  odious,  although  now 
people  have  become  quite  accustomed  to  it.  '  •''  He  thinks 
that  those  who  will  suffer  by  a  change  to  an  income  tax  are 
chiefly  misers,  absentees,  and  smugglers.'*  Sayer  takes  up  in 
detail  the  various  possible  modifications  of  the  old  income 
tax  which  experience  might  suggest,  and  he  discusses  with 
considerable  fulness  all  manner  of  possible  projects.  Among 
the  topics  treated  are  such  points  as  graduation,  differentia- 
tion, ta.xation  of  realized  property  only,  taxation  of  capital 
instead  of  income,  taxation  of  trades  and  professions,  the 
capitalization  of  income,  and  a  composition  of  the  tax.     Sayer's 


!'/.  .;/.,  p. 


O^.  (it.,  p.  103. 


136 


The  Income  Tax 


ll 


volume,  in  fact,  is  a  veritable  arsenal  of  arguments  on  both 
sides  of  almost  every  scheme  that  has  ever  been  adv  need  in 
connection  with  the  income  tax.  A  full  description  would 
require  a  chapter  by  itself.  We  must  content  ourselves  with 
his  general  conclusion  "  that  whatever  degree  of  evil  there  be 
in  taxation  is  less  to  be  obviated  or  mitigated  by  reducing  the 
amount  of  it,  than  by  changing  the  system  or  raising  it,  that 
is,  by  adopting  that  more  equal,  more  certain,  and  less  injuri- 
ous mode  of  transferring  the  exact  amount  of  income  due 
from  the  payers  to  the  receivers  of  it,  which  the  direct  tax  on 
income  most  palpably  presents."  ' 

Shortly  afterwards  Buckingham,  who  was  now  in  parlia- 
ment, again  brought  the  matter  up,  and  introduced  on  July  2, 
1837,  a  motion  for  a  committee  to  consider  the  advisability  of 
creating  a  graduated  property  or  income  tax,  with  which  to 
liquidate  the  national  debt.  Buckingham  stated  "  that  a  prop- 
erty or  income  tax  was  the  fairest  as  well  as  the  easiest  of 
all  ta.xes."  ■'  He  confessed  that  "  when  speaking  of  this  sub- 
ject in  private  he  had  been  conjured  not  to  let  the  words  '  in- 
come tax  '  escape  from  his  lips  in  Parliament,  as  it  would  drive 
a  large  majority  from  even  li.stening  to  him  afterwards."" 
Buckingham  devoted  most  of  his  speech  to  the  attempt  to  prove 
the  justice  of  graduation.  Lord  Althorp  in  reply  again  stated 
that  it  "  was  fair  debatable  ground  whether  some  portion  of 
the  tax  of  this  country  might  not  be  commuted  for  an  income 
tax,  but  he  should  be  very  sorry  to  see  Parliament  sanction  the 
principle  of  a  graduated  property  tax."  <  After  a  short  discus- 
sion, Buckingham's  motion  was  negatived.  In  the  following 
year,  however,  Buckingham  put  his  ideas  into  writing.  He 
now  proposed  that  the  rate  should  differ  according  to  the 

'  An  iitleml'l  to  shew  the  Justice,  etc.,  p.  356. 

'  liuckingham's  speech,  in  which  he  makes  plentiful  ijU'itatiims  from  Saver's 
book,  was  republished  by  him  after  the  lajise  of  sixteen  years  under  the  title, 
Dehatt  in  the  Home  of  Commons  on  the  Gradual  Extinctio'^  f  the  Xational  Deht, 
and  on  the  true  PrincipU  of  a  Property  and  Income  /  \.  r.  Kepublished  for 
comparison  wttK  Mr.  Gladstone's  financial  Proposition.  London,  1853.  See 
esp.  p.  15. 

'  Op.  cit.,  p.  19.  4  Op.  cit.,  p.  29. 


JL..A^-:it^->>^JJ^imk^it,^^!&JS^l^^^ 


The  Income   Tax  on   Trial,  1S42-1862        127 

kind,  as  well  as  the  size,  of  inccme,'  and  he  advocated  that 
as  a  partial  compensation  for  the  increased  rate,  the  larger 
taxpayers  should  he  entitled  to  additional  votes.  Referring 
to  the  claim  that  the  income  tax  is  inciuisitorial,  he  stated 
that  "  this  ohjcction  would  he  entitled  to  some  weight  if  the 
present  system  of  taxation  for  which  that  on  income  is  pro- 
posed as  a  suhstituto  were  entirely  free  from  any  inquisitorial 
examinations  into  men's  property  operations  and  affairs;" 
but  this  he  vigorously  denied. 

In  opposition  to  all  these  writers,  the  prevalent  feeling  of 
the  political  leaders  is  well  reflected  in  a  leading  article,  which, 
after  reviewing  in  some  detail  the  various  schemes,  concluded 
that  "  taxes  on  income,  though  theoretically  equal,  are,  in 
their  actual  operations,  the  most  unequal  and  vexatious  of 
any  that  it  is  possible  to  imagine."  ^  The  very  idea  was  in- 
dignantly repelled  by  Wells,  a  barrister  at-law,  who  declared 
it  as  his  belief  that  "  a  tax  which  will  convert  every  collector 
into  a  spy,  which  will  comjiel  the  gentleman  of  estate  and  the 
merchant  of  capital,  and  the  professional  man,  even  of  limited 
practice,  to  di.sclose  the  actual  net  amount  of  income  to  the 
state,  will  never  again  be  tolerated  in  I-'ngland."  ^ 

The  discussion  of  the  early  thirties  proved  to  be  only  a  flash 
in  the  pan.  The  old  system  continued  with  but  slight 
changes  until  an  entirely  different  situation  was  brought 
r'out  by  the  growing  movement  to  repeal  the  corn  laws. 
This  movement,  as  is  well  known,  before  long  became  a  for- 
midable one,  and  led  to  a  reconsideration  of  the  whole  fiscal 
problem.     The  agitation,  in  fact,  began  shortly  before  1840. 

The  advantages  of  a  direct  tax  over  the  excise  and  the 
customs  were  set  forth  in  a  well-written  pamphlet,  in  which 
the  author  suggested  "  an  assessment  on  all  property,  includ- 
ing the  public  debt   itself,  in   substitution    for   the    present 

'  "The  Superiority  of  an  Income  ami  Priipfrty  Tax  to  every  Other  Source  of 
Revenue,"  The  Parlinmcntary  AVr/.r,'.  vol.  v  (1SJ4),  p.  563. 

-  "  The  Proposed  Tax  on  I'roperty  and  Income,"  EJinhu'xh  /\nie;i\  vol.  Ivii 
('S33).  PP-  '43-'<>S. 

»  Th^  fi.-r.'Hii:-  ::r../  .'.':.-  Fx!'!t:dit!ir!  of  tkt  Unittd  k'in-'Jom .  By  Samuel 
Wells.     London,  1S34,  p.  187. 


128 


The  Income   Tax 


system  of  taxation."  '  Another  writer  made  an  earnest  plea 
for  a  property  lax,  by  which,  he  e\|)lained,  is  meant  "a  tax 
upon  income  derived  from  real  and  realized  property;  but 
not  upon  the  profits  of  professions  and  business."''  He 
thought  that  "a  j^raduated  scale  according  to  the  amount  of 
income  would  |)rol  ibly  be  the  most  just  principle."''  The 
production,  however,  which  perhaps  carried  the  most  weight, 
because  of  the  rc|nitation  of  its  author,  was  that  of  Wilson, 
who  advocated  an  income  tax  not  only  because  of  its  "  honesty 
and  fairness."  but  also  because  of  "the  probability  of  receiv- 
ing it  without  materially  pressing  on  the  ability  of  those 
interests  from  which  it  is  derived."*  Wilson  confessed  thut 
if  the  Chancellor  of  the  Exrhequer,  instead  of  suggesting 
more  taxes  on  consumption,  had  proposed  a  tax  on  property 
and  income,  "there  can  be  little  doubt  but  the  propo.sal  woul(' 
have  been  in  the  first  instance  received  with  great  surprise 
and  alarm.  Hut,"  he  adds,  "very  little  consideration  will 
show  that  it  could  have  been  justified  by  every  con.sidcration 
of  justice,  policy,  and  necessity."'' 


§  3-    Pal's  Act  of  1H42 

By  the  beginning  of  1842  Sir  Robert  Peel  was  finally  won 
over.  I'ccl  had  never  been  a  friend  of  tlio  income  tax.  In 
1830,  in  discussing  Iluskisson's  motion,  ho  manifested  his 
disbelief  in  it.  In  1833,  when  in  opposition,  lie  praised  Lord 
Althorp  for  not  proiiosing  an  income  tax,  and  declared  that 
in  his  ojiinion  nothing  but  a  case  of  extreme  necessity  could 
justify   parliament    in    imjiosing   an    income   tax  in    time  of 

1  Arguin'nl  i\i)  the  Cni.ral  Krlu-f  of  the  Cottulrv  from  Taxilion,  ,»«</  evtnt- 
ually  from  the  Corn  l.aw>,  hy  an  Aisessnent  on  J'roperty.      I,i>n(li)n,  1839,  p.  4. 

-  .\  Proferty  l.ix.  The  /uilief  ,in,l  Vtilily  of  a  I'roperty  T<ix  ,is  a  Means 
0/  Restorini^  the  Re:eituc,  plum,;  it  upon  a  permanent  Hasis,  anJ  affording  Fa- 
iilitici  for  the  /h-'eiopmeni  of  the  I'omiiieraal  and  Manu/aeturtni;  Kesounei  of 
the  Country.     I!y  a  True  l'(Miser\ativc.      I.onilun,  11.  cl.  [18.59],  P   5- 

'('A  ./A,]..  !■;. 

^  The  Ke-.enue  or,  ll'/iat  should  the  Chancellor  do  I'  liy  fames  Wilson. 
Luii.iun,  1841,  ]i.  19.  u  (y»   ,,/._  |,    ,v^ 


m^^ 


,li£J^ 


The  hmnne   Tax  on    Trial,  i,S^j  1S62         129 

peace.  Ill  1S35,  when  in  office,  and  opposing'  the  reduc- 
tion ot  the  malt  tax,  he  warned  the  landed  interest  to  beware 
how  they  cxchanije  "the  light  pressure  of  a  malt  dutv  for 
the  scour^x  of  a  property  tax."  In  1X39  he  opposed  the 
government's  proposal  to  introduce  penny  postage,  and  stated 
that  this  would  virtually  commit  the  Mouse  to  a  propcrtv  tax, 
although  he  now  added  that  possibly  it  might  be  wise  to 
resort  to  it.  Hut  even  in  1840  ho  approved  of  Haring's  plan 
to  meet  the  deficiency  in  the  revenue  by  additional  indirect 
taxes.  As  Buckingham  correctly  states,  I'eel  and  Altliorp 
"manifested  the  most  cordi  il  unanimity  on  this  subject,  and 
to  judge  from  the  speeciies  of  botli,  one  could  hardly  have 
thought  it  possible  that  either  would  ever  have  consented  to 
be  a  party  to  such  a  tax,  by  whomsoever  it  slu.uld  be  pro- 
posed." ' 

In  1842,  however,  matters  had  come  to  a  crisis.  The  p;inic 
of  1837  had  left  behind  it  a  wake  of  long-continued  distress; 
the  new  poor  law  was  unpopular;  the  Chartist  agitation  was 
acquiring  momentum;  and  the  Corn  Lnws  were  becoming 
increasingly  unpopular.  For  the  last  five  years  there  had 
been  a  repeated  deficit  in  the  budget.  In  1840  the  Chan- 
cellor of  the  I':xchequer,  Baring,  had  attempted  to  make  both 
ends  meet  by  a  general  increase  of  duties;  in  1841  he  en- 
deavored to  produce  the  same  result  by  reducing  the  duties 
in  order  to  augment  the  revenues.  All  these  experiments 
failed.  As  a  C(msequenrc,  Peel  finally  decided,  as  the  most 
likely  method  of  escaping  from  the  difficult  situation,  to  pro- 
pose a  revival  of  the  income  tax. 

In  his  great  budget  speech  of  March  1 1,  iS.j3,-  Peel  pointed 
out  that  the  deficit  for  the  coming  year  would  again  be  over 
two  and  one-quarter  millions  sterling,  bringing  the  deficit  for 
the  six  years  from  1S37  to  over  ten  millions.  He  declared 
that  a  reduction  of  expenditure  was  out  of  the  question,  and 

^  ri<in  of  an   ImftioiiJ  Iii.om,-  7,iv.     l!y  J.  S.  I!mkingli.im.     l,,,ivl.,n,  1845, 


^  Ilansanl,  vnl.  Ki.  pp.  451  ,f  »■/.     .\  ^■..,.■1  .^u 
i.U-'s  liveniy  }i'.iis  0/  /■iitii>i,i:i.'  /\</i,\;  ]>\k  12- 


ii.irv  of  this  is  fiiuri'I  in  V.ntli- 


no 


The  Income  Tax 


!(> 


\\    \ 


thus  addressed  himself  to  a  consideration  of  the  best  methods 
of  increasing  the  revenue.  To  au>;ment  the  indirect  taxes  he 
dismissed  as  impracticable  ;  for,  (juite  apart  from  his  reluc- 
tance to  add  to  the  burdens  of  the  laboring;  classes,  he  stated 
that  Baring's  experience  was  decisive  on  this  point.  "  I  can- 
not consent  to  any  proposal  for  increasing  taxation  on  the 
great  articles  of  consumption  by  the  labouring  clas.ses  of  so- 
ciety. Moreover,  I  can  give  you  conclusive  proof  tluit  you 
have  arrived  at  the  linMts  of  taxation  on  articles  of  consump- 
tion. "  One  by  one  he  took  uj)  the  other  possible  alternatives, 
only  to  reject  each  in  turn.  Finally,  after  adverting  to  the 
dangers  of  a  continued  deficit,  he  made  "an  earnest  appeal 
to  the  possessors  of  property,  for  the  purpose  of  repairing  this 
mighty  evil."  "I  propose,"  he  said,  "for  a  time  at  least  — 
(and  I  never  had  occasion  to  make  a  proposition  with  a  more 
thorough  conviction  of  its  being  one  which  the  public  interest 
of  the  country  required)  —  I  propose  that,  for  a  time  to  be 
limited,  the  income  of  this  country  should  be  called  upon  to 
contribute  a  certain  sum  for  the  purpo.se  of  remedying  this 
mighty  and  grow'-ig  evil.  I  propose  that  the  income  of  this 
country  should  bear  a  charge  not  exceeding  -jd.  in  the  pound, 
which  will  not  amount  to  ^3  per  cent,  but  speaking  accu- 
rately /^2  iXj.  4*/.  per  cent,  for  the  purpose  of  not  only  sup- 
plying the  deficiency  in  the  revenue,  but  of  enabling  me  with 
confidence  and  satisfaction  to  propose  groat  comnvjrcial  re- 
forms, which  will  afford  a  hope  of  reviving  commerce  and 
such  an  improvement  in  the  manufacturing  interests  as  will 
react  on  every  other  interest  in  the  country  ;  and,  by  dimin- 
ishing the  prices  of  the  articles  of  consumption,  and  the  cost 
of  living,  will,  in  a  pecuniary  point  of  view,  compensate  you 
for  )oin-  present  sacrifices;  whilst  you  will  be  relieved  from 
the  contemplation  wf  a  great  public  evil." 

Peel  had  hoped  that  parliament  might  be  willing  to  vote  the 
tax  for  five  years,  but  he  finally  decided  to  content  himself 
with  asking  for  its  imposition  for  Only  three  years.  He  did 
not  demand  that  it  should  be  applied  to  Ireland,  but  as  a  par- 
tial  compensation  he  proposed   the   raisiiiL^  of  the   dutv  on 


Tin-  Iiiiomc   fax  on    Trial,  /.S./.'  /.Vrt-»        131 


% 


Irish  spirits  to  the  Scotch  level,  as  well  as  the  raising;  of  most 
of  the  Irish  stamp  duties  to  the  lMi^;lish  level.  With  these 
new  sources  of  revenue,  I'eel  coiinteil  on  a  surplus  of  almost 
two  millions,  which  he  proposed  to  devote  to  a  reduction  of 
tiie  most  hurdenson'e  iniport  duties. 

The  introduction  of  I'eel's  income  tax  bill  precipitated  a 
loiij;  anil  excitiiij^  debate.  The  opposition  objected  to  the 
whole  fiscal  scluMue  in  general,  and  to  the  inc<in)e  tax  in 
|)articular.  Harin^^  dcci.ired  th.it  there  was  no  real  necessity 
for  "a  recurrence  to  that  odious  impost."  In  the  IIoii^c  of 
Kurds  Hrouj^ham  introduced  a  whole  series  of  resolutions 
in  op|)osition,  calling;  forth  a  reply  from  Lord  l<i|)on,  which, 
in  the  li;4ht  of  future  events,  is  exceedini;ly  interesting.  '■  En- 
tirely concurrini;,"  said  Kipon,  "in  the  noble  and  learned 
Lord's  deci.iration  that  the  jiroposcd  tax  was  a  resource  to 
which  Parliament  ou;;ht  not  to  have  recourse  except  under 
the  pressure  of  dire  necessity,  still,  unless  the  noble  and 
learned  Lord  thouj^ht  he  had  reason  to  believe  .  .  .  that 
there  existed  a  desif;n  on  the  part  of  the  government  to  en- 
trap Parliament  into  the  passing  of  this  act  on  the  plea  of 
absolute  necessity,  and  for  a  limited  period  only  .  .  .  unles.s 
the  noble  and  learned  Lord  thought  them  mean  and  shabby 
enough  to  direct  Parliament  in  order  to  get  the  measure  passed, 
and  then  afterwards  to  coiUinue  it  as  a  permanent  tax  .  .  . 
he  did  not  see  why,  as  a  preliminary  step,  their  lordships 
should  be  calletl  upon  to  declare  by  resolution  their  opposition 
to  it."  ' 

During  the  disiiission  Peel  reverted  to  the  subject  from 
many  different  points  of  view.  In  his  speech  of  March  18 
he  refeired  to  "the  great  objection  to  the  income  ta.x,  that 
which  arose  from  its  necessarily  inquisitorial  character,"  and 
he  called  attention  to  the  measures  suggested  by  him  for 
reducing  the  evil  to  a   minimum.''*     Alluding  again   to  the 

'  Spt-cch  .if  \lai\h  17,  1S42. 

-  I'his  was  rf])rinlO(l  in  a  laryi'  |nniiy  clitinii  as  ///c  Imome  I'li.x.  Sir  A'. 
/>/■/'(  S/':i;/i,  ill  Ihf  Ih'U^t:  •■/  l'o>"i'ioii<,  oi  /■rii/:iy  /■':,'iiin^,  A/,iy,)i  /.^,  /S/j. 
See  c.j,.  J..  ,S. 


U2 


The  Income  i  ax 


'  i 


demand,  voi'  ?d  especially  by  Attwood,'  that  holders  of  termi- 
nable annuities  be  taxed  at  a  lower  rate,  Peel  asserted  that 
"if  he  once  began  to  make  distinctions  of  this  kind  there 
would  be  no  end  to  applications  from  particular  interests  to 
be  exempted  from  the  operation  of  the  measure,  and  he  would 
be  obliged  to  abandon  the  original  ground  of  the  project  alto- 
gether. If  a  distinction  of  this  kind  was  to  be  made  in  behalf 
of  a  class  who  were  notoriously  powerful,  wealthy,  and  afflu- 
ent, it  would  be  very  easy  to  show  that  there  were  many 
other  classes  who  were  much  more  justly  entitled  to  the  ex- 
emptions which  they  claim. "^  He  made  a  fervid  appeal  to 
the  property  owners,  expressing  a  hope  "  that  the  high  and 
low  were  prepared,  in  a  crisis  of  commercial  difficulty,  to  pay 
a  fair  portion  of  the  txj  ense  rendered  necessary  by  the  cir- 
cumstances of  the  country." 

1  iC  long  d  •  ate  was  so  heated  that  it  involved  not  less  than 
sixteen  divisions,  but  the  bill  was  finally  passed  by  the  House 
on  May  31,  by  a  majority  of  106.  The  Act  of  1842'  which 
was  popularly  called  the  P»-operty  and  Income  Tax  Act,  was 
a  reprint  of  the  law  of  1806,  with  a  few  notable  alterations. 
In  the  first  place,  the  deduction  of  ^150,  which  in  1806  was 
restricted  to  incomes  from  trade,  professions,  and  personal  ex- 
ertions, was  again  made  apolicable  to  all  incomes.  Secondly, 
the  conditions  of  agriculture  had  so  changed  that  the  net 
profits  of  the  tenant  were  now  computed  as  amounting  in 
England  to  only  one-half  the  annual  value  and  in  Scotland 
to  about  one-third,  instead  of  the  old   figures  of   two-thirds 

'  Attwood's  speech  was  rcprinteil  and  widely  circulated  under  the  title  of 
The  Sf'teeh  cf  M.  Attwood,  i.uj.,  M.  /'.,  ,>«  the  Imome  7.7J-,  Committee  of  Ways 
and  Means  in  the  t/oiise  of  Vcmmom,  on  Wednesday,  March  2jrd,  1S4J,  Lon- 
don, 1X42.     See  esn.  pp.  3,  4. 

■'  Hid.,  p.  10. 

•  5  and  6  Vict.,  c.  35.  "  .\n  .Act  for  Granting  to  her  Majesty  Duties  on  Profits 
arising  from  Property.  Professions,  Trades  and  <  Hfices."  June  22,  1842.  A  sum- 
ni.iry  uf  (he  act  «as  issued  by  one  of  the  ofticials  and  distributeil  by  thousands 
under  the  title  of  'I'he  /ncom,'  Tax  Act,  l.pilomi:ed  and  Simplified.  By  William 
Nicholson.  London,  1842.  A  more  comprehensive  account  was  published  in 
1 7S  pp.  as  The  Income  Tax  Act,  ,-  and  6  Victoria,  c.  sj,  'vith  an  Explanatory 
Introduction  and  Index,     Hy  J-din  Pagt-t,     London,  '^l. 


The  Income  Tax  on   Trial,  1842-1862        133 

and  one-half  respectively.  In  other  words,  in  Schedule  B  the 
rate  of  the  tax,  in  lieu  of  being  yd.  in  the  pound,  or  about  three 
per  cent,  was  fixed  at  3]^.  fcft-  England  and  2\d.  for  Scotland. 
The  other  alterations  were  of  somewhat  minor  importance. 
In  Schedule  A,  in  the  case  of  the  so-called  "concerns  about 
lands,"  gas-work.s  and  railroads,  which  were  of  course  un- 
known at  the  period  of  the  previous  income  tax,  were  now 
included.  !■»  Schedule  C,  savings  banks  were  now  e.\empted, 
while,  on  the  other  hand,  the  exemption  to  foreign  holders  of 
the  public  debt,  which,  as  we  remember,  had  been  introduced 
at  the  solicitation  of  Pitt,  and  which  had  remained  through- 
out the  entire  period  of  the  old  war  income  tax,  was  now 
withdrawn.  In  Schedule  D,  the  income  of  charitable  institu- 
tions was  exempted,  while,  on  the  contrary,  the  privilege  of 
deduction  for  life  insurance  premiums  was  abolished.  Fiii.illy, 
the  old  section  permitting  the  acceptance  of  voluntary  contri- 
butions was  dropped. 

In  the  administrative  provisions  only  slight  changes  were 
made  from  the  law  of  1806.  The  most  important,  perhaps, 
was  the  provision  affecting  the  Special  Commissioners.  The 
Special  Commissioners  appointed  by  the  central  authority 
(now  known  as  the  Commissioners  of  Stamps  and  Ta.xes)  had 
their  functions  notably  extended  in  the  case  of  Schedule  D. 
All  persons  liable  under  that  schedule  might,  if  they  preferred, 
ask  to  be  assessed  by  the  Special  Commissioners  in  lieu  of 
making  their  returns  to,  or  being  assessed  by,  either  the 
General  or  the  Additional  Commissioners.  Roth  the  General 
and  the  Additional  Commissioners,  it  will  be  remembered, 
were  supposed  to  live  in  the  locality.  If  the  taxpayer  was 
averse  to  having  his  business  affairs  in  any  way  known  to 
neighborhood  officials,  he  would  naturally  select  the  Special 
Commissioners  appointed  by  the  central  government,  and 
not  coming  from  the  neighborhood.  These  Special  Com- 
missioners were  to  have  the  ordinary  powers  of  the  Gen- 
eral or  Additional  Commissioners.  Furthermore,  in  case 
of  an  assessment  by  the  Additional  Commissioners,  where 
the  inspector  or  surveyor  objected,   appeals  might  also  be 


134 


The  Income  Tax 


taken  to  the  Special  Commissioners.  The  final  appeal  in  all 
such  cases  was  to  be  to  the  Commissioners  of  Stamps  and 
Taxes. 

The  other  administrative  changes  were  as  follows :  In 
Schedule  A,  the  first  assessment  was  to  stand  for  three  years, 
and  not  for  two  years,  as  in  the  old  law.  The  penalties  for 
erroneous  returns,  as  well  as  the  surcharges,  were  hence- 
forth to  be  three  times  the  amount  of  tax,  and  not,  as  before, 
twice  the  amount.  Finally,  the  taxpayer  was  permitted  in 
the  case  of  assessment  by  the  Special  Commissioners  in 
Schedule  D  to  compound  at  once  for  a  period  of  three  years, 
the  composition  rendering  any  subsequent  statements  on  his 
part  unnecessary  during  that  term.  In  all  other  respects,  the 
provisions  of  the  old  income  tax  law  were  continued,  with 
the  ingenious  combination  of  local  self-government  through 
the  Commissioners  of  the  Land  Tax,  and  of  control  by  the 
central  government  through  the  inspectors  and  surveyors. 
All  these  provisions,  with  a  few  changes  that  will  be  subse- 
quently noted,  are  still  in  force  to-day. 

The  reimposition  of  the  income  tax  naturally  gave  rise 
to  a  discussion  which  swept  over  the  country,  and  which 
lasted  for  a  considerable  period.  Some  writers  were  bitterly 
opposed.  Whitock,  for  instance,  declared  that  "the  only 
thing  original  in  the  scheme  is  its  introduction  during  a  time 
of  peace.  It  is  most  inquisitorial  in  its  nature,  and  unequal 
in  its  application."  '  Hilditch  poured  out  a  volume  of  pro- 
tests in  no  less  than  three  separate  productions.^    He  tells  us 

'  An  Inquiry  into  tht  Came  of  the  present  Depression  of  Trade,  and  a  Remedy 
proposed,  in  a  Measure  lalculaled  at  the  same  time  to  olwiate  the  Xeressity  of  an 
Income  Tax.  By  Kiclianl  Wliituck.  Kdinburgh,  1842,  p.  62.  Whitock  sug- 
gesteil  as  an  alternative  the  enai  tment  uf  a  new  usury  law. 

''■  These  were  :  (a)  Aristocratic  Taxation  :  Its  present  State,  Origin,  and  Prog- 
ress, with  Proposals  for  Reform.  [By  R.  Ilililitch.]  Lon<lon,  1842,  52  pp.  This 
was  written  while  the  discussion  was  still  on.  (h)  Aristocratic  Taxation,  its 
present  State,  Origin  and  Progress,  with  Proposals  for  Reform  :  comprising  Proofs 
of  the  Justice  and  Expediency  of  a  land  Tax  for  Redemption  of  Xational  Debt : 
Strictures  on  the  Income  Tax  and  the  Idea  of  a  System  of  Taxation  not  only  with- 
out Purthen.  but  absolutely  in  itself  Heneficial.      By  Richanl  liililitch,     l.jjndon. 


The  Income  Tax  on   Trial,  1 842-1 862        135 

that  "nothing  enlarged  or  great-minded — nothing  in  fact 
beyond  the  most  rickety  accommodation  and  joinery  of  dis- 
crepant interests  and  parties  was  to  be  expected  from  Sir 
Robert  Peel" ; '  and  he  concludes  that  "  no  other  tax  is  so 
objectionable  as  the  income  tax.  No  other  is  at  the  same 
nominal  rate  so  really  unequal ;  no  other  so  imperiously  felt ; 
no  other  involves  such  odious,  though  ineffectual  inquisition 
into  private  affairs ;  no  other  puts  upright  men  of  the  produc- 
tive classes  to  so  much  expense  and  inconvenience,  or  offers 
to  the  fraudulent  such  easy  and  successful  evasion  ;  finally,  no 
other  is  collected  by  such  bungling  and  dangerous  arrange- 
ments, establishing  secret  and  irresponsible  tribunals,  foment- 
ing private  cabals,  using  most  harshly  the  best  subjects,  and 
unnecessarily  inconveniencing  all."^  Buchanan,  the  author 
of  a  large  work  on  taxation,  Ittcrly  complained  of  "these 
inquisitorial  proceedings,  arbitrary  as  they  are,  —  a  practical 
inroad  on  the  rights  of  freemen,  to  which  there  is  no  par- 
allel, even  under  the  most  absolute  governments  in  Europe, 
and  truly  an  anomaly  in  a  country  long  famous  for  its  love 
of  liberty."^  Others  maintained  that  a  property  tax  was 
preferable  to  an  income  tax,  and  that  if  an  income  tax  was 
unavoidable,  it  should  be  levied  only  on  the  income  from 
permanent  property.  Russell,  for  instance,  declared  an 
income  tax  to  be  "  an  awkward  and  cumbrous,  unequal,  in- 
quisitorial way  of  raising  the  revenue."  Defining  permanent 
property  as  consisting  only  of   land,  he  demanded  that  no 

1842,  70  jip.  'riiis  appcarcil  originally  in  the  A'or//i  of  England  Magazine. 
(<■)  The  Iniome  T<i.x  iritui.ifii aiiii  t^itomizeii,  containing  some  /'lain  Stalemenls 
on  the  Income  and  Properly  Tax,  showing  that  it  falls  most  hearily  on  the  indus- 
trious Classes  :  with  /nil  Inslructicns  for  filling  up  the  Tax  Papers.  liy  R. 
HiMitch.     Ij)n'li)n,  184J. 

*  T/ie  /ncomc  lax  criticised,  p.  1 5  ;   and  Aristocratic  Taxation,  p.  60. 

'^  The  Income  Tax  criticised,  p.  7  ;  Aristocratic  Taxation,  p.  54.  Cf.  his  still 
stronger  language  on  p.  5S,  ending  as  follows:  "The  <liscrction  of  a  judge,"  said 
the  great  and  vt-ncrahk-  Camden,  "  is  the  law  of  parents  ;  but  the  discretion  of 
an  interested  Income  Tax  Commissioner  is  the  law  of  Sir  Robert  Peel." 

^  Inquiry  into  the  Taxation  and  Commercial  /\)licy  of  (ircat  /Britain;  wit/i 
0/iservations  on  the  /'rincifles  of  Currency  and  of  Kxchantya/ile  Value.  Ry 
David  Buchanan,     tdinlturgh,  1844,  p.  102, 


136 


The  Income  Tax 


ti        I 


tax  be  imposed  on  "fluctuating  property,  such  as  stock  in 
trade." » 

The  tax,  however,  did  not  lack  ardent  defenders.  The 
author  of  a  Chartist  work  thought  that  "  property  has  been 
in  masquerade  long  enough,  and  the  sooner  the  mask  is 
removed  from  false  pretences  the  better."'  "Whatever 
obloquy,"  he  adds,  "may  belong  to  the  income  tax,  the 
solvent  and  the  honest  will  thank  the  Minister,  who  repudi- 
ates the  odium  unfairly  cast  on  what  is  termed  the  inquisi- 
torial, but  really  efficient,  machinery,  which  can  alone  ensure 
its  working."'  Another  radical  who  declared  that  the  income 
tax  "  is  a  tax  upon  the  rich  and  upon  those  persons  who  being 
idle  and  comparatively  useless  members  of  the  common- 
wealth, live  upon  small  incomes "  referred  to  "  the  talk  of 
those  radicals  who  oppose  the  income  tax,  about  their  '  love 
far  the  people,  the  masses,'  etc.,  as  just  so  much  insincere 
blarney  and  balderdash."*  Makepeace,  finally,  defended  the 
law,  although  he  desired  several  amendments,  stating  "  that 
parts  thereof  are  good,  and  parts  thereof  are  new ;  but  those 
parts  which  are  good  are  not  new,  and  those  which  are  new 
are  not  good."'  After  refuting  the  ordinary  current  objec- 
tions, he  stated  that  he  desired  graduation,  higher  taxation  for 
absentees,  and  exemption  for  children. " 


II 


§  4.    TJic  Development  to  1851 

The  income  tax  turned  out  to  be  more  productive 
than  had  been  anticipated.      Instead  of  yielding  three  and 

*  Financial  Reform.  A  Di/^est  of  the  Reasons  for  and  agaii,st  a  Tax  upon 
Permanent  Property,  in  lieu  of  some  of  the  Present  Taxes,  especially  those  oit 
CommoMties.     Hy  K.  ^V.  Kussell.     I.undon,  1S42,  pp.  20-21. 

-  Tory  Taxes.     London,  1842,  p.  9.  '  Op.  cit.,  p.  10. 

*  Income  Tax.  .4  /no  IVords  to  the  Operative  and  f.oiuer  Classes  of  the  People 
of  England,  upon  Sir  P.  Peefs  proposed  Income  Tax.  By  One  of  Themtilves. 
London,  1842,  pp.  6,  8. 

'  Taxation,  in  its  Operation  by  means  of  the  Income  and  Assessed  Taxes 
considered;  lo/;ether  with  Suggestions  for  its  Alteration  and  .intendment.  By 
William  Mr-.Ufpescr.     r.;-.nH:-.n,  n    =!.  [!.'?.13],  p.  5 


op. 


II,  vv  11-14 


The  Income   Tax  on   Trial,  1842  1S63        137 

three-quarter  millions  annually,  it  yielded  over  five  millions. 
But  by  the  time  that  the  tax  was  to  expire  in  1845,  expendi- 
ture had  increased   to   such  an  extent    that   Peel  foresaw 
another  deficit  for  1845.     In  his  budget  speech  of  1845  he 
asked:    "Will  you  run  the  risk  of  entailing  a  deficiency  in 
future  years  by  making  no  provision  for  the  time  ;  and  see- 
ing that   in    1846  the   revenue   will  be   suflficient  to   meet 
increased  expenditure,  will  you  postpone  the  consideration 
of  what   will   be   fitting   to  do   until  that  year  shall  have 
expired?"     The  answer   he   gave  was   that    such  a  course 
would  not  be  a  prudent  one.     The  real  cause  of  the  con- 
tinuance of  the  tax,  however,  was  different.     So  convinced 
had  Peel  now  become  that  greater  progress  must  be  made  in 
reducing  the   protective  tariff  and  in   diminishing  the  most 
burdensome  of  the  excises,  that  after  a  frank  acknowledg- 
ment of  the  fact  th  It  there  was  no  absolute  financial  necessity 
for  his  course,  he  suggested  a  continuation  of  the  income  tax 
for  another  three  yeirs,  "  not  for  the  purpose  of  providing 
the  supplies  for  the  year,  but  distinctly  for  the  purpose  of 
enabling  us  to  make  this  great  experiment  of  reducing  the 
ta.xes."     He,  however,  still  declared  Ihat  he  did  not  recom- 
mend the  income  tax  as  a  permanent  substitute  for  the  more 
onerous  burdens.     In  his  opinion  it  was  to  be  only  a  mere 
temporary  resource,  to  be  utilized  while  the  ordinary  revenue 
was  recovering  itself.     "  I  have  been  asked  what  assurance  I 
could  give  that  this  tax  should  expire  at  the  end  of  three 
years:  if  I  could  have  been  perfectly  sure  of  success  I  would 
have  proposed  it  for  five  years ;  at  the  same  time  I  do  think 
that  there  are  good  grounds  for  hoping  that  at  the  end  of 
three  years  you  may  be  at  liberty  to  discontinue  it." '     As  Sir 
Stafford  Northcote  points  out:  "  When  we  compare  the  lan- 
guage of  Peel  in  1845  with  his  words  in  1842  it  is  impossible 
not  to  feel  that  there  is  a  difference  of  tone,  indicating  a 
perhaps  unconscious  change  of  sentiment.     Not  that  in  1845 
any  more   than  in  1842  Sir  Robert  Peel  intended  to  impose 
the   income   tax  as   a   jjcri,      ent   tax,  or  contemplated   its 

'  Speech  iif  Ithruary  17,  1845. 


Ui 


138 


T/ie  Income  Tax 


I 


becoming  such  in  time  of  peace ;  but  he  had  become  a  little 
blinder  to  its  faults,  a  little  kinder  to  its  merits,  and,  above 
all,  a  little  more  alive  to  the  magnitude  of  the  work  that 
might  be  done  by  its  aid."*  Lord  John  Russell,  the  leader 
of  the  opposition,  although  characterizing  the  tax  as  one  in 
which  "  inequality,  vexation  and  fraud  were  inherent,"  never- 
theless stated  that  "  if  the  question  be  between  a  perpetual 
income  tax  and  the  continuous  monopoly  and  restriction,  I 
declare  for  the  income  tax  and  a  diminution  and  final  abolition 
of  all  monopoly." 

The  country  as  a  whole  also  supported  he  scheme,  not 
because  it  loved  the  income  tax  more  but  because  it  loved 
the  indirect  taxes  less.  The  prevalent  view  is  rather  vigor- 
ously expressed  in  a  widely  circulated  pamphlet  which  de- 
clared that  the  existing  system  of  indirect  taxation  was  "  bad  in 
principle,  mischievous  in  operation,  interruptive  in  prosperity 
in  every  department  of  active  life,  disadvantageous  to  the 
rich,  and  oppressing  and  destructive  to  the  poor."  "^  As 
Buckingham  pointed  out  in  reprinting  his  article  referred  to 
above,^  "  Time,  that  great  innovator,  has  wrought  marvelous 
changes.  Sir  Robert  Peel  proposes  an  income  tax  and  his 
followers  support  him.  It  was  at  first  meant  to  be  only 
temporary.  It  is  now  spoken  of  as  probably  to  be  made 
permanent.  Lord  John  Russell  objects  to  this  in  theory,  but 
votes  for  it  in  practice."*  Kvcn  McCulIoch,  who  published  in 
184s  his  comprehensive  treatise  on  taxation  in  which  he 
vigorously  opposed  the  income  tax,  conceded  the  strength  of 
Peel's  argument,  and  added:  "It  was,  also,  we  admit,  no 
easy  matter,  in  the  present  state  of  the  country,  to  point  out 
any  tax  or  taxes,  fitted  to  produce  four  or  five  millions  a  year 
against  which  several   formidable  objections  might   not  be 

*  Tnenly  Vfars  of  Financial  Poliiy,  pp.  70,  71. 

'  Reasons  for  a  Tax  on  Property,  in  Su/>slitulion  for  Duties  of  Excise  and 
Customs.     Ixjnilun,  1846,  p.  8. 

*  Supra,  page  121. 

*  Plan  of  an  Improved  Itucme  Tax  and  Real  Free  Trade.  With  an  Equi- 
table Mode  of  redeeming  the  Xational  Debt.  15y  James  S.  Buckingliam.  London, 
1845,  P-'"- 


The  Income  Tax  on   Trial,  1 842-1862        139 

urged."  1  McCulloch  thought,  however,  that  even  the  worst 
of  the  taxes  on  expenditure  "  are  less  objectionable  than  the 
most  carefully  devised  income  tax."  2 

Although  the  government  proceeded  rapidly  with  its  pro- 
gramme of  reducing  and  abolishing  the  protective  duties,  it 
did  not  go  fast  enough  with  the  repeal  of  the  excise  taxes  to 
suit  some  of  the  radicals.  Furnivall,  for  instance,  objected 
vehemently  to  the  high  excise  on  malt  and  hops,  and  sug- 
gested as  a  substitute  the  extension  of  the  income  tax  to  in- 
comes below  X,5o.a  The  same  idea  was  elaborated  with 
somewhat  different  arguments  by  Smce.  who  proposed  an 
addition  to  an  income  tax  by  "  a  tax  per  head  "  on  all  day 
laborers.*  On  the  other  hand,  Miller,  who  was  also  a  heated 
opponent  of  the  malt  excise  and  who  suggested  in  its  stead 
an  expansion  of  the  death  duties,  inveighed  bitterly  against 
the  income  tax  and  went  so  far  as  to  ascribe  the  crisis  of  1847 
very  largely  to  its  influence.  "  In  any  other  free  country  be- 
sides Great  Britain,"  ho  added,  "the  imposition  of  a  perpetual 
income  tax,  with  all  its  inquisitorial  accompaniments,  would 
be  the  germ  of  a  revolution."'^  The  climax,  however,  was 
reached  by  Gibbon,  who,  after  recounting  every  possible  ob- 
jection, stated :  "  If  human  ingenuity  had  been  racked  to  invent 
a  tax,  the  imposition  of  which  should  be  the  greatest  possible 
departure  from,  and  the  greatest  violation  of,  the  principle  of 
making  every  member  of  society  contributory  to  it,  in  due 
proportion  to  .  .  .  his  means  ...  a  tax  more  effective  of 
that  purpose  than  the  tax   upon  income  could   not  perhaps 

^A    Treatise  on  the  J'rhin/<les  ,inJ  /■racticnt  /n/lu,;ice  0/  Taxation,  and  the 
Funding  System.     l!y  J.  K.  McluU^ch.     Lon.lon,  1S45,  p.  133. 
■i  Ibid.,  p.  134. 

'  Taxation  AWis.d  and  Xational  Trof^ess.  13v  Thomas  Kiirnivall.  London, 
•847.  P-  S- 

The  Income  Tax  :  Its  Extension  at  the  present  Kate  proposed  to  ail  Classes  : 
aMishingthe  Malt  Tax,  Wind.Kv  Tax,  and  other  Taxes,  with  some  Observations 
on  the  Tea  Ihities.     I!v  William  Kay  Simo.     London,  n.  d.  [1846],  2d  ed.,  p.  9. 

'•  Suggestions  /or  a  denerat  F.,;ualization  oT  the  fan  I  Tax  and  the  Abolition 
of  the  Income  and  A'eal  Properly  Taxes,  and  the  Mall  n,4/y.  \W  s;amue!  Miller. 
London,  1848,  pp.  5,  6. 


ii 


rn 


140 


The  Income  Tax 


have  been  devised."*  Extreme  statements  of  this  kind  were 
counterbalanced  by  almost  equally  extravagant  panegyrics, 
of  which  that  of  Cobham  may  serve  as  a  type.  Cobham  con- 
fessed that  "jjerfection  cannot  be  attained  in  anything,"  but 
added,  "  Let  those  who  disapprove  of  the  income  tax  only  try 
to  propose  a  better  system ;  they  will  then  discover  the  diffi- 
culty—  the  impossibihty,  indeed,  of  doing  so."*  He  went  so 
far  as  to  demand  the  abolition  of  all  other  taxes,  and  their 
rei)lac3ment  by  a  single  income  tax. 

When  the  throe  years  expired,  in  1848,  Great  Britain  was 
in  the  throes  of  the  distress  caused  by  the  railway  crisis  of 
1847-1848.  John  Stuart  Mill,  in  his  great  work  published  in 
that  year,  had  lent  the  weight  of  his  authority  to  the  oppo- 
nents of  the  tax.  Although  he  conceded  its  theoretic  justice, 
he  found  the  real  objection  to  be  "  in  the  present  low  state  of 
public  morality,  the  impossibility  of  ascertaining  the  real 
incomes."  The  supposed  hardship  of  compelling  people  to 
disclose  the  amount  of  their  incomes  ought  not,  Mill  held, 
to  count  for  much.  But  as  flagrant  fraud  is  unavoidable, 
"the  tax,  on  whatever  principles  of  equality  it  may  be  im- 
posed, is  in  practice  unequal  in  one  of  the  worst  ways,  falling 
heaviest  on  the  most  conscientious.  .  .  .  The  unscrupulous 
succeed  in  evading  a  great  proportion  of  what  they  should 

'  A  Familiar  Treatisf  on  Tax,ition,  Free  Trmie,  etc.  Comprising  Facts 
usuallv  unnoliieJ  or  unconsidered  in  I'heories  of  those  Subjects.  With  Notes  on 
Subjects  arising  incidentally,     [liy  Alcxamler  (iibbon.J     London,  1846,  p.  223. 

A  somewhat  ri-iluccii  vtrsi.in  of  this  work  was  jiublisheil  a  few  years  later 
umlcr  the  title,  I'axalion  :  i/s  Xaturc  and  Properties,  with  Remarks  on  the  Inci- 
dence and  the  Hxpediency  of  the  Repeal  of  the  Income  Tax.  By  Alexander  Gibbon, 
Lomlon,  1851.  The  passage  quoted  above  is  foand  h<?re  on  p.  74.  Gibbon  now 
adils:  "The  tax  is  mure  otTensive  in  its  collection  than  any  other  tax.  beinf;  an 
inquisitorial  infringi-ment  of  the  !il)erty  of  the  subject  —  violating  the  sacred  reserve 
and  modesty  of  private  life  —  lowering  the  dignity  of  honourable  poverty  by  ex- 
posure of  it  —  causing  disgust  and  mortification,  and  exi  iting  evil  passions,  at  the 
subjection  of  the  most  private  affairs  to  the  scrutiny  (often  the  vexatious  or  ma- 
licious scrutiny)  of  equals  or  inferiors,  by  an  enforced  disclosure  to  them  of  such 
affairs."  -  -  Ibid.,  p.  76. 

-  Direct  J'axation.  The  Income  Tax,  the  Property  'Tax,  and  Free  Trade. 
Peace.  Retrenchment,  and  Captain  IVarner's  awful  Engines  of  War.  By 
Samuel  ('ol)ham.     1S4S,  p.  19. 


The  Income  Tax  on   Trial,  1 842-1862        141 

pay ;  even  persons  of  integrity  in  their  ordinary  transactions 
are  tempted  to  palter  with  their  consciences :  while  the  strictly 
veracious  may  be  made  to  pay  more  than  the  state  intended, 
by  the  powers  of  arbitrary  assessment  necessarily  entrusted 
to  the  commissioners.  ...  It  is  to  be  feared,  therefore,  that 
the  fairness  which  belongs  to  the  principle  of  an  income  tax 
cannot  be  made  to  attach  to  it  in  practice :  and  that  this  tax, 
while  apparently  the  most  just  of  all  modes  of  raising  a  reve- 
nue, is  in  effect  more  unjust  than  many  others  which  are 
prima  fiuic  more  objectionable.  This  consideration  would 
lead  us  to  concur  in  the  oj)inion  which,  until  of  late,  has 
usually  prevailed  -  that  direct  ta.\es  on  income  should  be 
reserved  as  extraordinary  resources  for  great  national  emer- 
gencies." '  With  a  large  deficit  staring  him  in  the  face,  how- 
ever, Lord  John  Russell  had  no  thought  of  abandoning  the 
income  tax;  on  the  contrary,  in  introducing  the  budget  on 
November  18,  he  went  so  far  as  to  recommend  its  renewal 
for  five  years,  at  the  rate  of  five  per  cent,  i.e.,  one  shilling  in 
the  pound. 

This  proposition  aroused  so  great  an  uproar  that  on  Feb- 
ruary 28  Sir  Charles  Wood,  the  Chancellor  of  the  E.xchequer, 
dropped  the  suggestion  and  asked  only  for  a  continuance  of  the 
tax  at  the  old  rate,  and  for  another  three  years.  "  !  do  not 
think  it  would  be  wise,"  he  said,  "to  attempt  to  force  upon  an 
unwilling  House  an  addition  to  an  unpopular  tax."  With 
this  modification  the  government  proposition  was  accepted. 
On  the  other  hand,  Hume's  motion  to  limit  the  tax  to  one 
year,  as  well  as  Horsman's  motion  to  introduce  the  principle 
of  discrimination,  wore  both  defeated  by  overwhelming 
majorities.  As  has  been  well  said,  "the  income  tax,  instead 
of  being  a  temporary  staff  which  might  be  thrown  aside  when 
it  had  served  its  turn,  had  become  a  permanent  and  necessary 
support  upon  which  it  was  evident  that  we  should  have  still 
to  lean,  and  to  lean  more  strongly  than  ever.  ...  A  triennial 

'  Principles  of  I'oliticat  Economy,  -with  some  of  their  .■t/<pliciitions  to  Social 


Phi 


§5- 


By  J 


uiin   htU3r 


Mill 


Lur.diin,    1040,   ii,  pp.  370,  377.     Book  v. 


n 


142 


The  Income  Tax 


income  tax  of  seven  shillings  in  the  pound  upon  every  kind 
of  income  alike,  seemed  to  have  taken  its  place  among  the 
recopnized  institutions  of  the  country,  and  to  be  equally  im- 
pregnable by  ministers  and  by  amateurs." '  The  only'chaiige 
in  the  administration  of  the  tax  during  the  next  few  years  was 
that  by  the  law  of  1849  the  Commissioners  of  Stamps  and 
Taxes,  to  whom  was  intrusted  the  supervision  of  the  income 
tax  as  well  as  of  the  other  internal  taxes  in  general,  were  now 
converted  into  the  Board  of  Inland  Revenue  which  has  ever 
since  administered  the  income  tax.'"* 

In  1 85 1  the  income  tax  was  for  the  third  time  expiring. 
While  the  fiscal  situation  was  more  favorable  than  in  1848, 
Sir  Charles  Wood  maintained  that  it  was  preferable  to  drop 
some  of  the  remaining  taxes  on  consumption  rather  than  to 
abandon  the  income  tax.  In  his  budget  speech  of  February 
17,  1 85 1,  he  accordingly  recommended  the  renewal  of  the 
income  tax  at  its  old  rate  for  another  three  years.  This 
was  now  combated  by  Lord  Stanley,  later  the  Earl  of  Derby, 
in  his  speech  of  February  28.  "  I  hold  it  to  be  an  object  not 
only  of  vital  importance  but  one  to  o'hich  the  faith  of  successive 
ministers  has  been  pledged,  that  the  income  tax  should  not 
be  permitted  to  degenerate  into  a  permanent  tax.""  Although 
the  government  carried  its  point,  Hume  introduced  a  motion 
that  the  tax  be  limited  to  one  year  instead  of  three  years,  in 
order  to  enable  a  committee  to  be  appointed  to  consider  the 
general  character  of  the  tax  and  the  desirability  of  differ- 
entiation. On  May  2  his  motion  prevailed,  and  a  few  weeks 
later  the  Select  Committee  was  appointed.  The  act  of  185 1 
made  only  a  slight  change  in  the  tax,  providing  that  when 

'  StalTord  VorthcDtc,  c<p.  tit.,  p.  107. 

-  12  anil  1  i  Vict.,  c.  I. 

■'  "  Without  that  pk-citji!."  he  adiltil,  "there  is  not  a  man  living  who  helieves 
that  the  House  of  Commons  in  1S42  woulil  have  consenteil  to  the  imposition  for 
an  hiiur,  of  a  tax  «hi  h  has  always  heen  held  to  he  a  resource  in  time  of  war, 
which  has  always  hei'n  <lfprecatcil  in  time  of  peace,  and  whicli,  take  it  as  you 
will,  leave  it  as  you  please,  must  be  full  of  anomalies  ami  inconveniences,  press- 
in;;  var-uusly  upon  iHHVrcnt  class;;s  of  the  community  ui:h  a  cumpliL'sieu  injus- 
tice that  no  mollification  can  altogether  remove." 


The  huonii'   Tax  on    Trial,  iS^  iSds        143 

actual  profits  fell  short  of  the  assessment  under  Schedule 
K,  an  ahatcment  should  be  allowed  in  the  case  of  tenant 
farmers.' 

Thcaj;itation  which  culminated  in  Hume's  successful  motion 
Is  well  reflected  in  the  pamphlet  literature.     Shortly  after  the 
parliamentary  debate  of  1.S48  an  anonymous  author  advocated 
a  tax  not  simply  on  "realized  property,'  but  on  "all  property  " 
or  "capital."  defining  this  as  "everything  having  a  money 
value."  '-'     "A  man's  nominal  income,"  he  thought,  "is  very  far 
indeed  from  being  a  te.st  of  his  ability  to  bear  taxation."     He 
held  that  incomes  from  professional  earnings  and  trade  should 
be  reduced  to  an  equitable  value  by  the  process  of  capitalization 
at  a  varying  number  of  years'  purchase.^     Heathf^eld  advanced 
a  slightly  different  scheme  in  which  he  suggested  a  tax  on 
property  combined  with  a  succession  duty.     "  The  proposal 
to  charge  |)roperty  and  not  income,"  said   Heathfield.  "  pro- 
ceeds, in  part,  from  a  strong  sense  of  the  inexpedience.  espe- 
cially in  a  commercial  country,  of  an  annual  inquiry  into  the 
affairs  of  individuals.     There  is  a  natural  and  reasonable  re- 
pugnance to  such  a  system."*      M.icCregor,  who  was  con- 
vinced of  the  impracticability  of  the  scheme  of  dit'lerentiation, 
as  proposed  by  Horsman,  preferred  a  "duty  upon  the  rents 
and  profits  of  all  realized  property,"  which  he  was  quite  will- 
ing to  have  arranged  according  to  a  progressive  schedule.'' 
Phipps  strongly  criticised  MacGregor's  scheme,  maintaining 
that  "  profits  of  trade,  so  far  as  they  represent  the  interest  of 
the  fixed  and  floating  capital  invested  in  it,  are  just  as  legiti- 
mately ta.xabli',  under  the  denomination  of  profits  of  realised 


'  14  and  15  Vict.,  c.  12.  soc.  ?. 

^  7'a'O  l.dters  to  a  Member  of  l\>rli.im,-iit :  ,,<)iLiintit^  Sii^e  ticn-  f.r  .1  Pr.—. 
trly  Tax  uponan  Imfroved  /iasis ;  -oith  Kfm,i>ii  uf.n  the  }-yin:<.;:U  S//-r.hr:  ci 
defense  of  the  present  Income  T,)x, during  the  Uue  /'>,:,2t,:.  IJy  K.  .S.  I;.  Un;  n. 
1848,  p.  9.  s  //,,./_  .,,,    ,.,  ,. 

*  Means  of  Extensive  Kelief  p\'m  the  Pi,  ii>f  ■■'  /., ■.<;,'.•  .'^.  -n  !'■■.<  Pat:  c  ,1 
Charge  of  Fire  fer  cent  on  all  /'roferly  in  the  I  'iiileu  A'lr^.io"!,  Pf.!:.inJ  /'■•:. -Kji. 
liy  Richard  Ilc-ithlicld.     I.ondo:-,  1849,  p.  20. 

M.  /'h  with  an  Introi/ii.lion  anJ  Sur,''\inenlarv  .W/cj.     I,un  Ln,  1S40. 


f  ll 


J  44 


The  Income  Tax 


'\ 


property,  as  is  the  interest  of  money  in  the  funds.'  '  Phippi 
thought  that  the  alleged  inequality  of  the  income  tax  could  be 
easily  removed  by  joining  to  it  a  general  inheritance  tax.' 
Babbage.  on  the  other  hand,  based  his  defence  of  the  income 
tax  on  the  theory  "that  taxation  ought  to  be  propoiJonal  to 
the  cost  ot  maintaining  those  institutions  without  which  no 
property  or  industry  can  be  protected,  or  even  exist."  ^  Bab- 
bage drew  the  conclusion  that,  as  all  kinds  of  income  occasion 
a  similar  cost  to  the  government,  they  should  be  taxed  equally 
and,  furthermore,  that  all  exemptions  should  be  done  away 
with.  "Abolish  all  exemptions  — or  else  reduce  the  exemp- 
tion to  the  lowest  possible  point,  and  disqualify  from  voting  all 
electors  who  claim  the  exemption.'"'  In  a  second  edition  of 
his  work,"  published  three  years  later,  he  went  so  far  as  to 
state  that  exemptions  lead  "  directly  towards  true  socialism." 
Professor  Heron,  who  defended  the  income  tax  as  certainly 
not  "nearly  so  inquisitorial  in  its  nature  as  the  excise,"'  ob- 
jected to  differentiation  on  the  "scientific"  ground  that  "all 
should  pay  to  the  government  at  the  same  rale  for  the  secur- 
ity which  enables  them  to  enjoy  a  unit  of  income  during  a 
unit  of  time.""  But  he  maintained  that  since  "income  is  lit- 
erally all  that  comes  in  to  a  man  in  the  year,"  it  "  must  include 
property  coming  in  by  w;iy  of  gift,  inheritance,  etc"  Thus 
he  thinks  that  "it  is  self-evident  that  this  solves  the  suggested 
difficulty  as  to  the  inequality  of  taxation  upon  incomes  of 
the  same  amount,  arising  from  sources  essentially  different  in 
their  nature.''*  M;u  I.cod  took  a  somewhat  similar  position 
in  an  able  and  well  written  production,  in  which  ne  stated  as 

'  .;  fc-.v  \Vc>;h  on  the  Ihrff  .Imi/nif  Hu.lgeli  of  Colxltn,  MiicGrtgor  and 
Wiuwn.     liy  the  Hnnuuralilc  Klmund  I'hipjw.     Ijindon,  1S49,  p.  12. 

••»  Op.  ill.,  pp.  iS-iy. 

»  Thoui^ht!  on  lite  rnncipUi  of  J'axiUioH.wilh  re/fence  to  a  Property  Tax,  and 
its  Ex.efihiis.  liy  (-harles  UalibaKc  London,  184S.  p.  7.  l\.r  the  general 
theory  of  cost  of  serviLO,  see  Scli^jnian,  /'rnfresshe  7'axiilion,  2(i  fd.,  1908,  part 
ii.,  thap.  ii.  *  Of  ~it..p.  iS.  MAindun,  1S51,  p.  iii. 

•  'Three  I.eittires  on  the  Principles  of  Titxation,  delivered  at  (^.rn's  College, 
Gulway.  in  Hiiirv  term,  /.'f,-.'.  I!v  Dinin  Caulneld  Heron.  Dublin,  1S50, 
p.  ,S<i.  •   t'/i.  .;/.,  p.  Sy.  "  Op  iit..  p.  90- 


T/ie  Income   Tax  on    Trial,  1S42  1863        145 

his  coniliision  that  "the  popular  objections  to  a  uniform  in- 
come tax  have  all  been  examined  and  found  invalid,  in  the 
case  of  a  temporary,  as  well  as  in  that  uf  a  perpetual,  tax."' 

§  5-     T/ie  Sclirt  Coinn.    Ur  of  iS^i 
Hume  met  with  considerable  ditTh  ulty  in  getting  his  com- 
mittee toRcther;  but  after  it  was  o  .ce  foiincd.  the  committee 
listened  to  so  many  witnesses  that  it  was  unable  to  make  any 
report  during  the  session  of    1851.      It  was  accordingly  re- 
appointed.    The  testimony  covers  two  stout  volumes  and  is 
almost  entirely  confined  to  the  ciucstion  ..f  the  desirability  of 
differentiating   the   rate   of   the   ^ax   according  to  the   kind 
ot   income.*     Among    the    most    important    witnesses   were 
actuaries  like  Hill.  Williams.  Scott,  Hn.wn.  Jellicoe.  Edmonds, 
Hardy,  and    Noison.     Some   of    these    maintained  that   the 
trouble  arose  from  calling  the  tax  a  "property  and  income" 
tax.     But  virtually  all  agreed  that  there  should  be  a  distinc- 
tion in  the  rates  between  what  was  variously  called  profes- 
sional, or  industrial,  or  temjiorary.  or  perishable,  or  terminable, 
or  life,  or  labor,  or  vari.ihle,  or  Heeting  income  on  the  one 
hand,  as  over  against  what  was  called  permanent,  or  imper- 
ishable, or  perpetual,  or  certain,  or  spontaneous,  or  property 
income  on  the  other.     And  almost  all  agreed  that  the  way  to 
accomplish  this  was  to  rctluce  all  incomes  to  a  capital  basis 

•  Kemarks  on  some  Popiiiir  Ohicitions  to  Ihc  fresnu  Income  Tax.  By  John 
MacPherton  .Vlacl.e.iil.     I.,jn  1  .n,  1849.  p.  22. 

■  Finl  Reporl  ;,oi>^  the  S,:,\l  C'Wiinlfee  .'n  the  huome  anJ  Property  T.i.x  :  to- 
gelher  -wal,  the  .Ifinii.'es  of  F:-,.le„.  e  .,;./  fnJe.x,  1652.  I.ori,l..n.  45S  pp.  Seeon.l 
Keport  from  the  Seled  Coomnttee  on  the  /neotne  ,utj  Properlv  tux  :  together  u-ith 
the  Proceedings  of  the  Commiitee,  Minnies  of  /./,/,;/, r,  .IppenJi.x,  and  Index. 
LonUon,  1852,  xxxiv,  5^0  |)p. 

A  goo.l  summary  ,,!'  the  evi.loiu-c  is  foun.l  in  Elements  of  r.ix.ilion  :  to  lohie'i 
are  added  a  Summary  of  the  tviJenee  addiieed  h/'ore  the  /:uli,i:>rr!,nv  Coin- 
mitlee  on  the  Property  and  huome  i\r\.  .Ind  oho  „  eompltle  .hi.tlyii.  of  the 
J-tminee  .Ueounli  of  the  United  A'ni^dun.  for  the  y„ir  /.?,/.  Ily  X  +  V.  Authors 
of  the  Tri/e  Kaiay  on  Direct  Taxaticii.  l..n,U,n,  ii.d.  [1853].  An  cUcmle.l 
criticism  of  most  uf  tlie  witnesst-s  is  r.uR.l   in    /V;,'  Peoples  Hhie  Pook  :    Taxation 

as    it   If,   till./  m     it    ,i>/.r/./    /,    /...  1'..   ("»..,..      r „  I     ..      ,c-  -         'rv  ■ 

'  --.1  ■- •  ,  '  ■:,j.     11:13  -.vcn: 

litions.     V      I.SI).  tlic  4tli  cJ.. 


'  -I 

Hi 

'■•  '] 

M 


sp. 


,  pp.  628-050. 


146 


The  Income   Tax 


% 


i; 


ill 


by  capitalizing  the  various  incomes  at  different  ratos.  In 
agreement  with  the  actuaries,  we  find  Farr,  the  expert  on 
life  statistics,  and  Jeffery,  who  represented  the  Liverpool 
Financial  Reform  Association.  On  the  other  hand,  the 
principle  of  differentiation  was  opposed  by  Babbage  and 
VVarburton,  the  latter  endeavoring  to  fortify  his  position  by 
recondite  algebraical  reasoning.  John  Stuart  Mill,  also  one 
of  the  witnesses,  thought  that  there  ought  to  be  a  differentia- 
tion, but  considered  the  plan  of  capitalizing  incomes  fallacious. 
He  objected  to  graduation  as  strongly  as  he  supported  differ- 
entiation. Mill  advanced  the  theory  that  savings  ought  to 
be  exempt  from  the  income  tax,  so  that  a  tax  would  really  be 
one  on  expenditure.  He  confessed,  however,  that  such  a 
scheme  would  be  quite  impracticable.  Three  Americans, 
Messrs.  Dudley  Selden,  Ashbel  Smith,  and  Colonel  Johnson, 
described  the  system  of  the  general  property  tax  as  it  existed 
in  New  York  and  Texas,  and  seemed  to  make  a  decided  im- 
pression on  the  chairman,  although  their  testimony  as  to  the 
operation  of  the  law  was  not  universally  favorable.  The 
most  valuable  evidence,  however,  was  given  by  the  English 
income  tax  officials,  like  Pressly  and  Welsh,  who,  after  show- 
ing the  immense  superiority  of  the  stoppage-at-source  system 
over  the  earlier  method  of  assessment,  stated  that  it  wou'd  be 
extremely  hazardous  to  tamper  with  the  existing  administra- 
tive arrangements,  and  declared  that  all  the  various  schemes 
that  had  been  propounded  were  utterly  impracticable.* 

The  Chairman,  Mr.  Hume,  proposed  an  elaborate  draft 
report,  suggesting  and  exi>laining  certain  changes.*  He  de- 
sired that  the  tax  be  adjusted  in  accordance  with  the  value 

'  Ri-ferrinfi  to  the  proposition  to  introduce  a  general  property  tax,  for  in.il&nce, 
Pressly  staled  ;  "  Instead  of  lieing  an  .■\ct  lo  impose  a  tax  on  property,  I  fear  it 
would  only  l)e  an  .Xct  for  collecting  voluntary  contributions  in  ai.i  of  the  support 
of  the  State."  —  Op.  lit.,  vol.  ii,  p.  252.  Referring  to  the  actuaries,  he  staled  :  "  I 
am  satisfied  that  y.>u  wdl  never  get  a  return  of  the  cai)ital,  and  that  you  will  make 
the  tax  nuich  more  in(|U!sitorial  and  odious  than  it  is  at  present."—  //'<V/.,  p.  255- 

2  The  report  was  republished  l.y  the  I.iv.rpool  Financial  Reform  Associatiim 
as  New  Series,  no.  .J,  of  the  Hyianciai  h'.-foi  ni  I'r.i.h  under  the  title.  The  Draft 
KrKorl  N-ofoseJ  hv  /ou-pli  Hunif,  Eu).,  the  c'uiinn.in  of  the  Seitcl  Committee  on 
the  Income  ami Vropeity  Tax.     Liverpool,  n.  d.  [1S52J. 


The  Income   Tax  on   Trial,  1842-1862        147 


of  the  property,  as  well  as  with  the  tenure  and  the  age  of  the 
owner.  The  members  of  the  committee,  however,  were  not 
convinced  by  his  arguments,  and  failed  to  agree.  As  a  con- 
sequence, the  evidence  was  transmitted  to  Parliament  without 
any  recommendation  at  all. 

The  failure  of  the  committee  to  agree  was  the  signal  for 
an  outpouring  of  periodical  and  pamphlet  literature  on  both 
sides  of  the  question.  Hemming,  in  reviewing  the  evidence, 
opposed  what  he  called  Habbages  "  bargain  and  sale  theory  " 
of  taxation,  and  declared  himself  in  favor  of  a  discrimination 
between  " certain  and  precarious  income."'  Farr  expanded 
his  testimony  in  favor  of  capitalization,  in  a  lengthy  article.* 
Willich,  who  declared  that  the  evidence  showed  the  impossi- 
bility "of  arriving  at  any  mode  of  levying  the  tax  which  will 
be  theoretically  just  and  practically  possible,"^  contented 
himself  with  recommending  a  rate  of  two  per  cent  on  tem- 
porary incomes  and  of  four  per  cent  on  permanent  incomes. 
An  anonvmous  writer  suggested  six  and  a  half  per  cent  on 
professional  incomes,  seven  per  cent  on  life  incomes,  and  eight 
per  cent  on  incomes  from  realized  property.*  The  manager 
of  a  life  insurance  company,  Scott,  advocated  a  somewhat 
analogous  scheme.''  Major  Court  desired  that  the  inequali- 
ties between  the  two  chief  sources  of  income  be  removed  by 
making  the  distinction  in  the  abatements  rather  than  in  the 
rate  of  tax."     Hubbard,  who  shortly  afterward  became  Gov- 

'  A  Just  Ineomt-  Td.x,  ''/<•:(■  /■,>. tc''/, .  Ihiiis;  <r  Rerinv  of  the  Evidence  re/>orteii 
/ly  the  Ittuime  'lax  Comi)iille<\  ,iii,/ ,ni  Ini/iiiry  into  the  True  Principle  of  'ia.yo- 
lion.     Hy  (i.  \V.  lUMiimint;.     I,.iiitlun,  1X52,  p.  21. 

''■  William  1-arr.  " 'I  lie  IiunniL-  anil  rrupcrty  Tax,"  four  mil  of  the  Statistiaxl 
Society  of  I.oiuioii,  vol.  \vi  ( 1855),  pp.  1-44. 

^letters  on  Ihc  Income  Titx  :  Coiiici-sion  of  (.'on  sols :  Savings  tianlcs  ami 
Friendly  Societies.     I!y  Charles  M.   Willicli.     '.onion,   1S53,  p.  5. 

'  Equitable  TaAiilion  and  h'ef'cicniation  on  a  fixed,  general  and  clearly 
defined  Principle.     London.   1S52,  p.  i>. 

^  The  Property  and  SniO'iu-  Tax  the  I'cst  l\i\  for  the  Communily.  Hy  E.  Erskine 
Scott.     London,  1S52. 

'■  ,-7  Kevieiv  of  llie  Income  7 <ix  in  it>  Kclafiom  to  the  National  Debt ;  with  Sug- 
gestions for  Kcnioral  of  its  present  Inequalities,  Iv  a  more  L  'ni/orm  Mode  of 
Aucssmcni.    iiy  Major  M.  H.  t'ouit.    Luii-.!i.r!,  \%y     'f.\!.  29  of  the  3d.  ed.,  1855. 


liU 


148 


Tfu  Income  Tax 


m 


ernor  of  the  Bank  of  England,  took  up  in  detail  the  argu- 
ments in  favor  of  what  he  calls  the  "  indiscriminating  tax 
on  incomes," '  and  paid  his  respects  to  botH  Babbage  and 
Warburton,  while  he  chided  Mill  for  advocating  a  progres- 
sive inheritance  tax.  "  Mr.  Mill  disclaims  the  impolicy  of  a 
graduated  tax  on  the  property  of  the  living,  but  would  apply 
one  to  the  property,  not  of  the  dead  {iov  the  dead  have  none), 
but  of  the  living  who  gain  it  by  an  inheritance.  Surely,  in 
either  case,  graduation  arraigns  the  dispositions  of  Provi- 
dence, subverts  individual  rights,  and  shows  itself  to  be  in 
principle  but  a  step  towards  Socialism."^  In  the  following 
year  Hubbard  considered  more  at  length  the  objectors  to  the 
scheme,  especially  Maitland  and  Warburton,  and  endeavored 
to  refute  their  arguments.'  The  Liverpool  Reform  Associa- 
tion, through  its  president,  Robertson  Gladstone,  issued  a 
letter  to  Babbage  taking  exception  to  his  views  on  exemption, 
and  obj'cting  strongly  to  the  fact  that  owners  of  unproduc- 
tive property  were  not  liable  to  income  tax.*  An  enthusiastic 
argument  in  favor  of  a  property  tax  was  made  by  Gisborne 
who,  in  commenting  on  the  excellent  administration  of  the 
income  tax  as  disclo.sed  in  the  evidence  before  the  committee, 
said :  "  We  only  regret  that  so  much  industry  and  ingenuity, 
and  good  machinery  should  have  been  applied  to  a  tax  which 
is  so  outrageous  in  principle,  that  the  wisest  man  could  not 

,      '  /Airy  ShouU an  Income  T,ix  he  Ir,  ici?     ConsiJeieJ  in  a  Letter  to  the  Kif^ht 
Honourable  Benjamin  Disraeli,  Chancellor  of  the  Exchequer,    IJy  John  (jellibrand 
Hubbard.     Loii(ii)n,  1852,  p.  2O. 
-  Op.  cit.,  i>.  31. 

•  h'eform  or  Reject  the  Income  Tax.  Ohjectiom  to  a  Ke/orni  of  the  Income 
Tax  comi.lercl,  in  tivo  letters  to  the  KJilor  oj  the  limes,  with  additional  Xotes. 
Hy  Juhn  GiUibranJ  Uubbanl.  I.umlDn,  185),  pp.  24  rV  v./.  Ilubbaril's  IkxA 
is  reviewed  rather  adversely  in  an  article  in  the  i.dinhur/^h  Kevinv,  vol.  xcvii 
('**53)>  P-  240.  A  number  of  other  works  on  the  name  subjcrl  are  reviewed, 
ibid.,  p.  5JI. 

♦  A  Letter  to  Charles  Babbage,  Esq.,  in  Heflv  to  his  "  I'houf/its  on  the  Prin- 
ciples of  Taxation,  with  reference  to  a  Property  Tax  and  its  Exceptions."  Uy  the 
Liverpool  Financial  Reform  .Association.  Liverpool,  1S52,  p.  18.  In  an  Appen- 
dix to  thi»  tract  is  printed  a  strong  letter  from  Lord  Jeffrey,  in  favor  of  discrimi- 
nation. 


The  Income   Tax  on   Trial,  1842-1862         149 

say  anything  in  its  defence  which  any  ordinary  man  could  not 
refute."  *  Gisborne  was  enamored  of  the  system  of  the  gen- 
eral property  tax  as  he  found  it  described  as  existing  in  the 
United  States.  In  the  light  of  our  modern  experience  it  is 
not  a  little  amusing  to  read  that  "  we  cannot  but  admire  the 
easy  and  simple  machinery  by  which  the  tax  works  both  in 
New  York  and  Texas." »  He  closes  with  the  narve  remark 
that  "  no  one  can  avoid  a  property  tax,  and  this  I  think  one 
of  its  main  recommendations."  ^ 

The  chief  opponent  of  differentiation  was  Maitland.  In 
an  anonymous  pamphlet  he  stated  that  the  tax  had  now 
undoubtedly  become  permanent.  "  I  cannot  help  concluding 
that  the  tax  will,  with  or  without  modification,  be  a  perma- 
nent national  burden."*  This,  in  itself,  he  thought,  robbed  the 
argument  for  "  discrimination  "  of  much  of  its  weight.  Even 
apart  from  this,  however,  he  opposed  discrimination  on  the 
ground  of  the  diffusion  theory  of  taxation,  holding  that,  in  the 
long  run,  matters  would  right  themselves.'"'  He  maintained, 
further,  that  "although  graduation  and  discrimination  are 
different  things,  yet  I  believe  it  will  be  found  that  they  are 
closely  related.  Both  depend  upon  the  feeling  that  any 
deduction  from  a  small  or  precarious  income  will  press  more 
heavily  than  a  large  deduction  from  a  large  and  secure  in- 
come."" Accordingly,  while  he  applauded  .Mill  for  opposing 
graduation,  he  declared  him  illogical  in  at  the  same  time 
upholding  discrimination.  In  a  ])roduction  published  in  the 
following  year,  Maitland  returned  to  the  charge  and  sought 
to  show  that  the  arguments  of  his  opponents  defeated  each 
other.' 

•  Tkoughls  on  an  Inconif  Tax  aii.i  on  a  Pro/'frly  Tax :  frincipally  founded 
on  the  T.-uleiue  t.tkni  b\-  ihf  Uouif  of  Coinmom  Committee  in  the  session  /Sj/. 
Uy  Thumas  (.jisburnc.    Lonilon,  1S52,  p.  14. 

a  tJ/-  '"'.  P  41-  »  f/.  «•/.,  p.  61. 

*  Prup.rty  and  Imome  Tax,  Hchedule  .  I  and  Schedule  D.  [  lly  J.  G.  Maitland.] 
London,  185^,  p.  2. 

'  Of-  (it.'  pp.  ,i-i  I.  '1  op.  at,  pp.  56,  57. 

'  Property  and  Income  Tax  The  Present  State  of  the  (>Hcsfion.  By  J.  G. 
Maitland.     London,  1S53.     Si'e  esp.  p.  ;**. 


150 


T/u  Income  Tax 


11 


Disraeli,  however,  was  won  over  by  the  arguments  of  the 
discriminationists.  When  he  became  Chancellor  of  the  Ex- 
chequer in  the  new  cabinet  of  Lord  Derby,  he  had  time,  in 
making  his  financial  statement  in  April,  1852,  only  to  pro- 
pose the  continuance  of  the  income  tax  for  another  year. 
In  De'  ;mber,  however,  when  he  presented  his  budget  for  the 
following  year,  he  proposed  to  renew  the  income  tax  for  three 
years,  and  to  reduce  the  rate  of  Schedules  D  and  E  from  jd. 
to  5|^/.  He  also  suggested  that  farmers  should  be  assessed 
hereafter  on  one-third  instead  of  one-half  of  their  rent,  and 
that  the  limit  of  exemptions  be  reduced  to  ^50  for  industrial 
incomes  and  £,  100  for  property  incomes.  As  he  combined 
with  these  sugg-istions  the  scheme  of  a  great  increase  in 
the  house  tax,  this  practically  meant  a  decided  relief  to  the 
agricultural  community  at  the  expense  of  the  towns.  Dis- 
raeli's proposals,  however,  led  to  vehement  opposition.  They 
were  denounced  by  Duncombeas  "  preposterous,"  by  Osborne 
as  "based  upon  tyranny  and  injustice,"  and  by  Gladstone  as 
"  most  regardless  of  those  general  rules  of  prudence  which  it 
is  most  absolutely  necessary  we  should  preserve."^  The 
government  was  defeated  on  the  house  tax  proposition,  and 
Disraeli  was  replaced  by  Gladstone  as  Chancellor  of  the 
Exchequer. 

§  6.    Gladstone  s  Budget  of  185J 

Gladstone's  financial  statement  of  April  18,  1853,  is  rightly 
considered  one  of  his  masterpieces.^  Me  beg.an  by  asking 
whether  an  effort  should  be  made  to  part  with  the  income 

'  C/.  the  (iiscussicm  in  /is,,i/  /fi^i.i'.i/ion,  /,Ty2-/.?6,-.  ^  Rninvoftht  Financial 
Changes  of  that perioj,  an.i  I'utr  tffeils  upon  Kertiiue,  Trade,  Manufactures  and 
Emplovmrnli.     liy  Jnhn  NmIiIc.     London,  iSO;.  p.  53. 

-  N'icliiilsMn,  I'nnnpUs  of  J'olifi.,il  Eionomv,  iii,  ii)ol,  p.  539,  declares  it  to 
lie  "probalily  \W  llnt-st  orati.in  ..n  linanie  i  vcr  iklivcrod,  .md  certainly  the 
strongest  in  argument."  In  mlditJ.Mi  tu  the  j-assase  in  Hansard,  it  is  found  in 
full  in  The  financial  Statements  <//,?,-,',  /St>o-i<f<j.  To  which  are  added  a 
Speech  on  Tax-Pills,  iShi,  an. I  on  Charities,  /V6;..  l!y  the  Kt.  lion.  \V.  V.. 
Gladstone       L.indon,   1H63.      It    is    discusseil    in    Northcotc,    Twentv    Years  of 

tlHuii.i.ii  j'vtii),  p|j.    i;Sj|-iy.j. 


Ill  •' 


T/ie  Income   Tax  on   Trial,  1842-1862         151 

tax  at  once.  "  I  do  not  say  that  such  an  alternative  is  im- 
possible," he  replied ;  but  he  did  not  recommend  it,  because 
in  his  opinion  the  new  taxes  which  it  would  be  necessary  to 
impose  "  would,  upon  the  whole,  be  far  more  unequal,  and 
would  cause  greater  dissatisfaction  than  the  income  tax," 
and  furthermore,  because  "it  would  arrest  other  beneficial 
reforms  of  taxation."  He  went  on  to  emphasize  the  fact  that 
the  House  "should  fully  appreciate  the  power  of  t^is  colossal 
engine  of  finance,"  and,  referring  to  the  imposition  of  the  in- 
come tax  by  Pitt  ill  1799,  he  maintained  that  "if  there  had 
been  resolution  enough  to  submit  to  the  income  tax  at  an 
earlier  period,  our  debt  need  not  at  this  moment  have  existed." 

Referring  to  Peel,  "  who  called  forth  from  repose  this  giant, 
who  had  once  shielded  us  in  war,  to  come  and  assist  our  in- 
dustrious toils  in  peace,"  he  said :  "  The  second  income  tax  has 
been  the  in.strumcnt  by  which  you  have  introduced,  and  by 
which  I  hope  ere  long  you  may  perfect,  the  effective  reform 
of  your  commercial  and  fi.scal  system."  This  he'  thought 
would  finally  spread  to  other  countries  as  well;  "If  we  rightly 
use  the  income  tax,  we  shall  be  entitled,  when  we  part  with  it, 
to  look  back  upon  it  with  some  satisfaction,  and  to  console 
ourselves  for  the  annoyance  it  may  have  entailed  by  the  recol- 
lection that  it  has  been  the  means  of  achieving  a  great  good 
immediately  to  England,  and  ultimately  to  mankind."  He 
did  not,  however,  for  a  moment  conceal  his  opinion  that  the 
tax  "  is  not  well  adapted  for  a  permanent  portion  of  your  fiscal 
system,  unless  you  can  by  a  reconstruction  remove  what  are 
called  its  inequalities.  Even,  however,  if  you  could  remove 
itslnequaUties,"  he  added,  "there  would  still  remain,  in  my 
mind  at  least,  objections  to  it  of  the  gravest  character." 

With  some  of  the  objections  he  did  not  agree.  The  matter 
of  discrimination,  for  in.stance,  he  declared  was  virtually  a  ques- 
tion of  the  distinction  between  land  and  trade.  As  to  this, 
after  a  careful  analysis  of  the  facts  he  concluded  that  land  and 
hou.ses  actually  paid  a  higher  rate  than  trade.  He  held, 
therefore,  that  so  far  as  these  are  concerned,  there  was  no 
suiTicient  ground  to  aitcmpt  a  reconstruction  of  the  income 


152 


The  Jnconie  Tax 


t:'  i 


»  i 
I  ■ 


t 


tax.  Taking  up  next  the  other  phase  of  discrimination, 
namely,  the  difference  between  precarious  and  realized  in- 
comes, or  what  he  preferred  to  call  "  industrious  "  and  "  lazy  " 
incomes,  Gladstone  held  that  there  was  practically  no  income 
which  was  "  perfectly  and  entirely  a  lazy  income,  except  the 
income  of  the  fund-holder";  and  there  were  in  his  mind  in- 
superable objections  to  levying  a  higher  tax  on  the  funds. 
The  scheme  of  the  actuaries  for  a  capitalization  of  the  income 
tax  he  brushed  aside  as  a  "mere  mathematical  speculation," 
which  "of  all  the  plans  of  income  tax  reform  is  placed  the 
furthest  beyond  the  reach  even  of  imagination,  as  a  possible, 
or  as  a  feasible  measure."  Finally,  coming  to  the  case  of 
professional  incomes,  Gladstone  confessed  that  it  "  appeals  to 
our  sympathies."  But  he  held  that  here  also  "you  cannot 
exempt  professional  incomes  without  breaking  up  the  whole 
scheme  of  the  tax."  "  The  real  tendency  of  all  these  exemp- 
tions," said  Gladstone,  "  is  the  breaking  up  and  destruction  of 
the  tax.  I  do  not  say  the  'relinquishment,'  because  relinquish- 
ment is  one  thing  and  breaking  up  is  another.  To  relinquish 
it  is  altogether  safe  because  it  is  altogether  honourable;  but 
to  break  it  up  is  to  encourage  the  House  of  Commons  to  ven- 
ture upon  schemes  which  may  look  well  upon  paper  and  may 
serve  the  purpose  of  the  moment,  yet  which  will  end  in  the 
destruction  of  the  tax  by  the  absurdities  and  by  the  iniquities 
which  they  involve." 

Gladstone  closed  this  part  of  his  speech  by  stating:  "One 
thing  I  hope  this  House  will  never  do,  and  that  is  to  nibble  at 
this  great  question  of  state  policy.  .  .  .  Depend  upon  it,  when 
you  come  to  close  quarters  with  this  subject,  when  you 
come  to  measure  and  test  the  respective  relations  of  intelligence 
and  labour  and  property  in  all  their  myriad  complex  forms,  and 
when  you  come  to  represent  these  relations  in  arithmetical 
results,  you  are  undertaking  an  operation  of  which  I  should 
say  that  it  is  beyond  the  power  of  man  to  conduct  it  with 
satisfaction.  .  .  ,  Whatever  you  do  in  regard  to  the  income 
tax,  you  must  be  bold,  you  mu.st  be  intelligible,  you  must  be 
decisive.     You  must  not  palter  with  it.  ...   1  believe  it  to  be 


The  Income  Tax  on   Trial,  1S42  1H62  153 

of  vital  importance,  whether  you  keep  this  tax  or  whether  you 
part  with  it,  that  you  cither  should  keep  it  or  should  leave  it, 
in  a  state  in  which  it  will  be  fit  for  service  on  an  emergency ; 
and  this  it  will  be  impossible  to  do,  if  you  break  up  the  basis 
of  your  income  tax." 

Passing  on  to  the  question  of  the  permanence  of  the  tax, 
Gladstone  pointed  out  that,  while  it  is  an  engine  of  gigantic 
power  for  great  national  purposes,  "  there  are  circumstances 
attending  its  operation  which  make  it  difficult,  perhaps  im- 
possible, at  any  rate,  in  our  opini()n  not  desirable,  to  main- 
tain it  as  a  portion  of  the  permanent  and  ordinary  finances 
of  the  country.  The  public  feeling  of  its  inequality  is  a  fact 
most  important  in  itself.  The  inquisition  it  entails  is  a  most 
serious  disadvantage,  and  the  frauds  to  which  it  leads  are  an 
evil  such  as  it  is  not  possible  to  characterize  in  terms  too 
strong."  It  is  essential,  he  thought,  to  allay  the  feeling 
"  that  the  country  is  about  to  be  entrapped  unawares  into  its 
perpetuation."  He  proceeded  to  unfold  his  plans  "to  lay 
the  ground  for  placing  Parliament  in  such  a  position  that  at 
a  given  period  it  may,  if  it  shall  think  fit,  part  with  the  tax." 
Here,  however,  he  put  fairly  and  squarely  before  the  House 
the  alternative:  "If  you  determine  to  renew  the  income  tax, 
will  you  make  its  early  extinction  your  first  and  sole  object, 
or  will  you,  in  order  to  bring  to  completion  the  noble  work  of 
commercial  rjform  which  is  so  far  advanced,  once  more  as- 
sociate the  income  tax  with  a  remission  of  duties,  extensive  in 
itself  and  beneficial  to  the  community  ?  Wo  have  considered 
fully  these  two  'Iternatives,"  added  Gladstone,  "and  we  have 
decided  dclibera'^'My  in  favour  of  the  second."  In  other  words, 
Gladstone  projioscd  that  the  tax  be  renewed  for  two  vcars  at 
yd.  in  the  pound,  for  two  more  years  at  dd.  in  the  pound, 
and  for  three  more  years  at  5^/.  in  the  pound ;  so  that  at  the 
end  of  seven  years,  or  in  i860,  the  tax  would  expire. 

Such  was  Gladstone's  argument  on  the  income  tax.  The 
income  tax  has  been  of  incalculable  assistance,  but  it  is  an 
inherently  bad  tax.  It  must  therefore  .serve  onlv  as  a  tem- 
porary measure.      The  alleged  inequality  of  the  tax,  espe- 


»54 


The  Income  Tax 


daily  from  the  point  of  view  of  difftrentiation,  '%  perfectly 
true ;  but  the  remedy  is  impracticable.  The  only  way  to  get 
rid  of  the  inequality  is  to  abolish  the  tax  itself ;  and  since  the 
tax  is  to  be  kept  only  as  a  temporary  tax  it  is  better  to  con- 
tinue it  with  these  inequalities  rather  than  to  disrupt  it  as  an 
engine  of  finance.  The  objection  that  property  as  such  pays 
but  little  as  compared  with  industry  is  met  by  the  proposal  to 
extend  and  to  generalize  the  Death  Duties. 

Gladstone's  suggestions  led  to  a  heated  debate,  in  which 
Cobden,  Disraeli,  Henley,  and  Bulwer-Lytton  took  part;  but 
Gladstone  carried  all  his  points  by  a  large  majority.  Not 
only  did  he  succeed  at  the  time  in  turning  the  tide  of  public 
opinion,  but  so  commanding  was  his  mastery  over  parliament 
and  the  country,  that  as  long  as  he  remained  in  power  he 
was  able  successfully  to  resist  any  attempt  to  alter  the  essen- 
tial character  of  the  tax. 

The  new  law  of  1853'  included  some  important  changes. 
The  tax  was  extended  to  Ireland,  which  was  now  treated  like 
Scotland,  except  that  the  assessment  in  Schedules  A  and 
B,  instead  of  being  on  the  full  annual  value,  was  upon  the 
valuation  for  the  poor  rate ;  i>.,  generally  twenty  per  cent 
below  the  full  annual  value.  In  arguing  for  the  cessation  of 
the  exemption  of  Ireland  from  the  taxation,  Gladstone  had 
said :  "  Let  me  remind  the  Committee  what  exemption 
means;  it  does  not  mean  that  we  have  got  a  bottomless 
purse,  that  we  can  dispense  exemptions  to  one  man  without 
injuring  another.  No,  sir.  The  exemption  of  one  man 
means  the  extra  taxation  of  another,  and  the  exemption  of 
one  country  mears  the  extra  taxation  of  another."  It  was 
this  consideration  that  carried  the  day. 

Professional  incomes  (Schedule  D,  second  case)  were  now 
charged  on  the  average  profits  of  the  last  three  years,  like 
the  profits  of  trade.  Investors  in  life-insurance  policies  were 
allowed  to  deduct  the  amount  of  their  premiums.  In  the  act 
of  1806,  it  will  be  remembered,  the  allowance  for  life-insur- 
ance premiums  was  restricted  to  persons  with  an  income  of 

■  16  and  17  Vict.,  c.  34. 


Tlu  Income   Tax  on   Trial,  1842-1862         155 

^150  or  less.  In  1842  this  allowance  was  not  granted. 
Now  it  was  reintroduced,  but  made  applicable  to  incomes  of 
all  amounts.  So  far  as  abatements  and  exemptions  were 
concerned,  the  total  exemption  was  now  reduced  from  ^150 
to  £,\QO,  while  incomes  between  ;{;ioo  and  ;^i5o  were 
charged  only  5,/.  instead  of  the  regular  -jd.  Some  changes 
were  also  made  in  the  administration  of  the  tax.  The  con- 
cession granted  in  1850  to  tenant  farmers  to  have  the  assess- 
ments in  Schedule  D  reduced  to  the  actual  profits,  if  they  fell 
short  of  the  assessment,  was  now  extended  to  all  tenants. 
Furthermore,  an  important  alteration  was  made  in  Schedule 
p.  Under  the  Act  of  1843.  it  will  be  remembered  that  the 
income  from  foreign  government  securities  in  Schedule  C 
was  to  be  assessed  by  Special  Commissioners,  and  that  the 
bankers,  or  other  individuals  charged  with  the  payment  of 
the  interest  were  required  to  make  returns  of  such  payments. 
This  provision  was  now  extended  to  the  securities  of  all 
foreign  companies  under  Schedule  D.  thus  making  the 
bankers,  or  agents,  virtually  responsible  for  the  tax  on  all 
foreign  securities  whether  public  or  private. 


%  y.   A  Decade  of  Quiet 

The  expectations  aroused  by  Gladstone  as  to  the  early  ex- 
tinction of  the  tax  were  doomed  to  be  disappointed.  Instead 
of  the  tax  being  reduced  according  to  his  forecast,  the  prep- 
arations for  the  Crimean  War  in  1854  and  1855  entailed  the 
necessity  of  increasing  the  rate  until  it  reached  the  figure  of 
IJ.  2r/.  — a  rate  higher  than  any  time  since  1842.  In  1857  Sir 
G.  Lewis  reduced  the  rate  to  7^/.,  and  in  1858  Disraeli,  in  the 
hope  of  carrying  out  the  proposals  of  1853,  reduced  it  still 
further  to  5^/.  In  1859,  however,  when  Glad.stone  again  be- 
came Chancellor  of  the  E.vchequer.  he  raised  the  rate  from 
Id.  to  9^/..  simply  because  he  needed  the  moncv.  Now,  for 
the  first  time,  the  tax  was  utilized,  in  time  of  profound  peace, 
as  the  elastic  element  in  the  biidgct.  and  was  inrrL-ascd  for 
the  year  in  order  to  make  good  a  deficiency  in  the  ordinary 


I  i 


;> 


150 


The  Income   Tax 


revenue.  When  i860  arrived,  Disraeli  pointed  out  that  the 
income  tax  "is  unfortunately  still  alive;  nay,  nice,  it  is  a 
child  which  has  gradually  grown."  As  has  been  well  said: 
"  Alas,  at  the  end  of  seven  years,  the  long-suffering  nation 
found  itself  in  possession  not  of  the  much-desired  Rachel, 
but  of  the  ill-favored  Leah."  ' 

Mr.  Gladstone  now  made  his  second  great  budget  speech, 
in  which  he  carried  through  the  commercial  treaty  with 
France  and  did  away  witli  all  the  remaining  survivals  of  the 
protective  tariff.  But  in  order  to  make  up  the  deficiency,  in 
part  at  all  events,  he  was  compelled  to  increase  the  income 
tax  to  icv/.,  the  highest  point  it  had  yet  reached  in  time  of 
peace ;  "  and  this,  cruel  fate,  in  the  very  year  in  which  it  was 
to  have  disappeared."  '  The  question  of  the  repeal  of  the 
tax  was  not  even  discussed. 

The  administrative  and  other  changes  that  were  made  in 
1861  and  the  two  previous  years  were  as  follows:  In  1859 
the  illowance  for  life-insurance  premiums  was  extended  to 
contracts  for  deferred  annuities  issued  by  the  government.'* 
In  i860  it  was  provided  that  railway  profits  should  henceforth 
be  assessed  by  the  Commissioners  for  Special  Purposes,*  and 
that  the  tax  on  salaries  of  railway  officials  and  employees 
under  Schedule  K,  likewise  to  be  assessed  by  the  .Special 
Commissioners,  should  be  paid  by  the  company.*  In  1861  the 
provisions  of  the  act  of  1853  appUcable  to  the  securities  of 
foreign  companies  were  still  further  extended  to  those  of 
colonial  companies,  the  banker  or  agent  being  made  respon- 
sible for  the  tax." 

So  convinced,  however,  were  many  members  of  parliament 
that  the  tax  was  now  in  a  fair  way  of  becoming  permanent, 
that  Hubbard  was  able,  despite  the  opposition  of  Gladstone, 
to  carry,  on  February   19  1861,  his  motion  for  the  appoint- 


'  .)/'-.  Gliullone :    A  Study.     By  Sidney  liuxton.     I.i)n(l()n,  1901,  p.  134. 
-  IhiJ.,  p.  44.     Fur  cvact  lij^ures  as  to  the  annual  rati-  anil  yield  iif  the  income 
tax  «■!■  Appendix  t.i  chap,  iii,  infra, 

*  22  and  23  Vict.,  c.  iS.  sec.  6.  »  lhi,l.,  sec.  6 

*  23  and  24  Vict.,  c.  14,  sec.  5.  «  24  and  25  Vict.,  c.  91,  sec.  36. 


The  Income  Tax  on   Trial,  1^42-1  S62         157 

mcnt  of  a  Select  Committee  "  to  inquire  into  the  present  mode 
of  authorizing  and  collecting  the  income  and  pn.periy  tax, 
and  whether  any  mode  of  levying'  the  same,  so  as  to  tender 
the  tax  more  equitable,  lan  Ix:  adopted."  An  interesting 
glimpse  into  Mr.  (Jladstones  attitude  on  the  question  of  per- 
manence is  afforded  by  his  speech  of  that  date.  "  Necessity," 
sa  1  Gladstone,  "drove  us  to  it  in  1842.  and  necessity  has 
attached  us  to  the  use  of  it."  And  when  he  was  interrupted 
by  cries  of  "no!  no!  "he  added:  "When  I  used  the  word 
•  attached '  I  meant  not  as  a  bridegroom  is  attached  to  his 
bride,  but  as  a  captive  is  attached  to  the  car  of  his  con- 
queror." 

The  spell  of  Gladstone's  oloquencc  in  1853  had  not  only 
converted  parliament,  but  had  silenced  for  a  time  all  discus- 
sion. The  only  e.\cei)tion  was  the  republication,  with  a  new 
preface,  of  the  speech  '  f  r  a  graduated  income  tax  which 
Buckingham  had  delivered  in  I833.*''  Toward  the  end  .f  the 
fifties,  however,  the  discussion  was  n-sumed,  and  the  move- 
ment for  reform  soon  ac(iuircd  considerable  momentum.  In 
1858  the  Birmingham  Income  Tax  Reform  Association  was 
formed,  for  the  purpose  of  "removing  the  injustice  and  op- 
pression which  are  goading  the  tax  paying  classes  into  a  state 
of  discontent  and  disaffection."  ^  They  objected  to  the  tax  as 
"a  violatior.  of  the  principles  of  free  trade,"  *  and  demanded 
not  only  the  adoption  of  the  system  of  capitalization,  but  also 
the  acceptance  of  that  of  self-assessment.  "  As  to  industrial 
incomes,  let  every  man  make  his  return,  which  shall  be  final, 
under  the  .sanction  of  an  oath  or  solemn  declaration.  Thii> 
inquisitorial  powers,  antl  the  .secret  tribunal,  would  be  got  rid 
of."^ 

'  Deb.ite  in  the  Home  of  Comntiins  en  tht  Cr     imI  Extinction  of  the  Xational 

Debt,  an  .  ,'f the  till:  /'•  iiui/'l,-^  .r' •'  /'■  'fterfy  !  In:  m-:  /j.i.  Ke/'uNnheJ for 
compariionwilh  (,i.i,htone's  Unancial  Frcpcil^  n.  T  liy  I.  S.  I'.uckingham  ] 
Ixindun.  1M53. 

'  Supra,  p.  121. 

'  AMlreis  of  the  Incomt  Tax  Keform  Asso^^  :lion  '  faHtshea  at  Birmingham, 
Affy  3$,  iS -.'■..     IMrmir.ijham,  I.M:;:.  r;.  : 

*  Of.  (it.,  p.  6  i  Up.  i-it.,  p.  12. 


«58 


The  Income   Tax 


It 


, 


Two  years  later  the  Committee  issued  a  forcible  address, 
declaring  themselves  "  uncompromising  opponents  of  the 
present  income  tax  laws  because  those  la>«H  are  unjust  in 
principle,  inequitable  in  application,  and  oppressive  in  opera- 
tion."' Schedule  U  was  naturally  the  chief  subject  of  their 
ibjurgations,  and  they  concluded  that  "a  tax  that  outrages 
justice  alike  in  principle  and  in  operation,  will  be  abolished 
by  your  fiat  in  spite  of  any  ministry."  *  A  similar  association 
formed  in  London  issued  an  adt'  ess  in  the  same  year,  pro- 
testing against  the  continuance  and  increase  of  the  tax  and 
complaining  of  the  "stealthy"  proceedirgs  of  the  govern- 
ment.^ An  amusing  dialogue  on  the  income  tax  which  ap- 
peared at  about  the  same  time  states  that  "an  income  tax, 
levied  as  at  present,  is  a  graduated  property  tax,  the  gradua- 
tion of  taxation  being  so  contrived  as  to  fall  with  crushing 
weight  on  the  shoulders  of  industry,  to  the  relief  of  accumu- 
lated wealth."  *  The  author  of  a  diffuse  treatise  on  taxation 
known  as  The  People  s  Blue  Hool',''  was  invincibly  opposed 
to  the  continuance  of  the  tax.  "  It  is  manifestly  an  impressi- 
bility," he  tells  us,  "ever  to  impose  a  tax  on  ii.comes,  neces- 
sarily uncertain  in  amount  and  precarious  in  tcrnMnation, 
which  will  not  be  unequal  and  unjust,  and  in  direct  violation 
of  every  rule  and  maxim  which  should  govern  taxation."" 
His  remedy  was  a  tax  on  realized  property  combined  with  a 
"  tax  on  persons  "  through  the  medium  of  a  hou.se  tax.  The 
same  ;)lan  was  approved,  with  a  few  modifications,  by  the 
author  of  a  tract,  who  signed  himself  a  mill-owner."     Stans- 

'  AJ./ifss  of  the  Birmini^ham  Income  Tax  Rtform  AisocintioH  lo  the  RUctors 
of  Great  Hritain  and  IreUnd,  l-th.  iX^j.     BirminKliatn,  n.  il.  ['•'^S?].  P-  3- 
^  Of.  cit.,  p.  lo. 

•  The  Property  ami  Imome    Tn.x  Association  to  the   Taxpayers  of  the  UniteJ 
Kingdom,     I.onilim,  n.  d.  [1857],  p.  5. 

*  The  Shade  of  Cocker  and  the   Chancellor  of  the  Exchequer.     A  Dialogue  on 
the  Income  Tax.      Lnnilon,  n.  (I.  [c.  1S58],  p.  8. 

'  tor  the  full  title  see  aliuve,  page  I45. 
"  Of.  cit.,  p.  346  i,f  the  eel.  of  1872. 

'  TaxalioH  :   Gro^s  Injustice  of  the  f  resent  .System.     Direct  Taxation  the  true 
Atmedy.     By  a  Mill  Owner.     Edinburgh,  1859,  p.  17. 


m^m^ 


The  Income  Tax  on    Trial,  1842-1H62         159 

fclcl  preferred  a  property  tax  to  an  income  tax  on  the  ground 
that  "  money  may  be  considered  as  the  honey  of  a  society, 
and  from  its  accumulated  stores  and  deposits,  and  not  from 
the  working  bees  returning  to  their  hives  with  laden  limbs 
against  the  adverse  winds  should  the  chief  contributions  for 
the  support  of  the  State  i)e  taken  :  To  star\e  the  bees  and 
spare  the  '  ones  is  bad  policy,  even  for  the  drones  them- 
selves "  ,)n  repeated  his  uncompromising  opposition 
.  '"clared  his  preference  for  taxation 
opinion  on  an  old  and  long  ex- 
>on  income,  however  modified  in 
never  be  incident  so  fairly  and 
"f  pcnditure  or  consumption.  Taxes 
■!  ilsory  contributions  —  while  taxes 
■n  .jmptiun  are,  in  a  very  great  meas- 


to  th 
on  c 
pill  ; 
t' 

MM,     l- 


,lt'  t'l\ 


ure,  n;   .  , 
Othe    ^ 
vided  th^ 


Ills. 


A  ling  to  accept  the  income  tax,  pro- 
-crimination  might  be  adopt»d.  Thus 
the  Liverpool  Financial  Reform  Association  confessed  that 
there  were  defects  in  the  tax,  but  contended  that  with  all  its 
faults  it  was  preferable  to  indirect  taxation.  Referring  to  the 
anti-income-tax  agitation,  they  said  :  "  Fully  endorsing  your 
catalogue  of  grievances,  and  having  reminded  you  of  others 
which  seem  to  have  been  very  generally  forgotten,  we  are  not 
at  all  surprised  that  you  should  be  indi[^nant  and  disgusted  at 
and  with  the  mcome  and  property  tax,  as  it  is  at  present  as- 
sess J  and  levied;   but  we  think,  nevertheless,  that  a  little 


'  Outlint  of  I)  Srstem  of  Piireci  7j.r.;;  for  :ut/rtJtng  Cuit.n^.-  anJ  Ejtme 
Duties,  ami  est.ihlnhin^  p'ffit  Ireeiixi  0,  lie  l'.y  Han,- .  Mari>fc!  i.  L..n- 
don,  n.  d.  [185.)].  p.  9.  The  metaphor,  it  .  ..1  he  seen.  i»  the  wme  as  that  u«  d 
in  1907  hy  Andrew  (  arnegie  in  upp<  .ng  the  fc  ieral  inc  me  tax  ;n  the  Irr.cd 
Mates.  C<  his  speech  before  the  .Wili^.nal  c  j:  ;.  JiJe'atnn  at  the  aiin-ii  meet- 
ing in  Decern l>€r,  1O07. 

'  Thf  Income  Tax :  its  Cause;  anJ  IndJence  :  shcxirtg  .'■!  .lHi:.'y:ii  th.::  ;.  <j 
a  l.anJ  lux,  a  House  Tax,  a  Tax  ufcn  Commoditiei  anJ  a  hr^uJution  of 
Public  Debt.     \\s  Alevan.ier  (liM..ii.      I.4.n  I  ^n,    I'-'jo.  p.  2\      '.  L.-- n    itilares, 

*n     %n     ^\  r>lawaf/tr.-    n^>*A     *^2t     tHi%     !rZ;'t       %     ;:"'.V    -       ;*: 
I85I. 


./  -   ..^.-t    .  t    v.;_   t,.. 


i6o 


The  Income  Tax 


I 


1 


serious  reflection  will  suffice  to  convince  you  that  the  remedy 
you  seek  will  be  very  much  worse  tha.i  the  diseases  of  which 
you  complain."  •  Browning  stated  that  "judgingfrom  the  readi- 
ness with  which  it  has  been  received  by  the  nation,  it  may  be  as- 
sumed that,  although  much  clamour  was  made  for  the  repeal 
of  the  war  portion  of  it,  generally  speaking,  a  tax  on  income 
is  favourably  viewed  by  a  large  majority."*  He  thought 
that  discrimination  would  remove  whatever  objections  re- 
mained. Hubbard,  who  lost  no  opportunity  of  harping  on 
his  own  idea,  delivered  a  lecture  in  which  he  claimed  that  "  a 
property  tax,  as  it  is  now  levied,  is  an  odious  thing."  ^  Pro- 
fessor Levi  wrote  a  treati.se  in  which  he  stated  that  "  the  in- 
justice of  taxing  all  kinds  of  income  at  equal  rates  will  be  best 
appreciated  when  we  consider  the  saleable  value  of  different 
kinds  of  property."* 

^  AdJren  on  the  I'reicnt  Anti- Income  Tax  Agitation  :  shmmng  how  and  why 
Pireit  Taxation  is  preferahle  to  Customs  and  Excise  Duties.  Hy  the  Liverpool 
Kinancial  Kfforin  Assoc'ation.  New  Series,  no.  19.  Liverpool,  1856,  p.  5.  Nu- 
merous essays  were  |iu!>lishe(l  eitlier  l>y,  or  umlcr  the  auspieea  of,  the  Association, 
all  enipliasizinj;  the  S.-1111C  iioint.  cy:  the  f'lUowing :  Direct  and  Indirect  Taxa- 
tion cuitraitcd:  or  the  iiiiiiicamraniv  Trefcrable  I'olicy  of  an  Income  Tax  to 
Customs  and  I.xcise  Duties,  elucidated.  By  lawrcnce  llcyworth.  n.d.  [1861]; 
Taxation  :  Director  Indirect.  .In  Essay  intended  to  he  read  to  the  Economic 
Section  of  the  Hritish  .Association.  By  I'rancis  lioult.  Liverpi>ol,  1861;  The 
Kights  of  Kich  and  I'oor  :  Just  Taxation:  .Abolition  of  all  Duties  on  the  Xeces- 
saries  of  life,  etc.  l!y  deortjc  Henry  Smith.  Liverpool,  n.  d.  [l8(')i];  Essay 
on  Taxation,  Direct  and  Indirect,  with  Suggestions  f  r  its  Kr'ision.  By  Thomat 
Clarke.  Liverpool,  1851.  ("/:  also  the  Scotch  p.-imphlet,  /«<//>'</  luxation:  lit 
Wasteful  and  liitrdensome  .Witiire.  as  compared  with  Direct  Taxation,  in  neces- 
sarih  causini;  the  I'tihlic  to  pay  much  more  than  the  Amount  imposed  l>v  Parlia- 
ment:  and  the  most  /•i/uitable  .Mode  of  imposing  Direct  faxes  on  Property.  By 
Duncan  M'l.arcn.  Kilinhurjjh,  iSo<>.  Kor  a  later  pamphlet  by  the  same  author 
see  infra,  p.iK<^  I ''4. 

'  The  finances  of  Great  flrilain  con  .dere  Comprising  an  ExaminatioH  of 
the  Property  and  Income  Tax,  and  Succession  Dutv  .Act  of  iSjij.  By  Reuben 
Browning.     Part  I,  London,  1851),  p.  11. 

■'./  fecture  on  Currency,  I'ax.ition,  and  ftfianie,  delivered  at  the  Tou-n  Hall, 
Buckingham,  on  the  Jist  of  April.  By  John  (Jclliliraml  Iluhbard.  n.  d.  [1859! 
p.  22. 

'  On  Taxation  How  it  is  Kaised,  and  how  it  is  Expended.  By  Leone  Levi, 
London,  I.^o.  1,  p.  11;  ^.  The  «ub«t.->nce  of  this  w.k  published  \n  a  paper,  "<  In  the 
Uistrihuli'in    nnd    I'm  lui  livcness    of    V.wn    «illi    reference    to  the   Prospective 


ff^ 


Tlic  Income   Tax  on   Trial,  1842-1862         161 

Professor  Neate  contended  that  the  principle  of  differen- 
tiation flowed  naturally  from  the  theory  of  benefits  in  taxation, 
although  he  conceded  that  "  it  may  not  be  easy,  and  may  pos- 
sibly be  impracticable,  to  estimate  in  money  the  value  of  that 
difference." '  On  the  other  hand,  Dr.  Hooth  in  an  address 
before  the  British  Association  opposed  discrimination  chiefly  on 
the  ground  that  if  the  tax  were  perpetual,  perpetual  incomes 
would  pay  their  share.-  This  was  in  effect  the  argument  of 
Warburton  before  the  comnMttee  of  1852,  and  an  attempt  to 
refute  it  was  made  by  Sargant,  in  an  address  in  which  he  de- 
clared himself  strongly  in  favor  of  the  principle  of  differen- 
tiation.3  It  is  evident,  therefore,  that  there  was  a  widespread 
interest  in  the  matter  which  formed  the  subject  of  Hubbard's 
committee. 


§  8.    The  Committee  of  1861 

The  Committee  comprised,  in  addition  to  the  cha:-;nan,  Mr. 
Hubbard,  such  men  as  the  Chancellor  of  the  K.vchequer, 
Mr.  Lowe  and  Sir  Stafford  Northcote.''  Among  the  chief 
witnesses  were  Hubbard  himself,  Xcwr.iarch,  Farr,  and  Mill, 
all  of  whom  agreed  with  the  chairman.  Hubbard  presented  a 
memorandum  in  which  he  made  a  clas-sification  of  "  property- 
incomes  "  as  compared  to  "  industrial    incomes."*      Inciden- 

.■\meliorations  in  the  Public  Revenue  of  tlie  Unile.l  Kingilom,"  inihe  fourmil  of 
the  Stahstiial  Soaelv,  v,,l.  will  (|8()0),  pp.  in-hs,,  aii,i  sipar.itil^  nprinteil. 

'  Three  Lectures  on  Ja.t.ttio,,,  eipenully  Ih.  r  „/ /.an./,  aeltia,./  al  Oxford  in 
the  year  iSbo.     Ity  Cliarlts  .Ne.iie.     ()\f,,ril,  I'-'  i,  p.  K). 

'  "  On  the  Principk-s  ..f  an  In,  unie  fas."  ii  ,\urn,i/  of  the  St.itis/unl  So,ief\; 
viil.  xjtiii  (  i860),  p.  45(1.  H..„tl,  alsci  ,.pp(.scci  iht  schiiiie  of  the  Liverpool 
Kinamial  Reform  Association.      //>i,/,  p.  4(11. 

•William  l.uci'.s  .Salaam,  " -Sonic  Olistrvations  on  the  iallacy  o|  the  Warliurtou 
Argument  in  favor  of  an  in  li^eriniinatinn  Iniomo  las,"  in  /oiirii.u  of  the  S/,iti.\- 
tieal  Society,  vol.  xxiv  (1S61 1.  p.  Ji  j. 

*  kefort  from  the  Select  Commtrtee  on  /noine  iinJ  /'ro/iertv  /',ix  .■  tat^ether  with 
the  Preeeei/ings  of  the  Commillee,  Minnies  of  l-.viJeme,  and  AffenMx.  iSoi, 
301  +  51  pp. 

»  In  the  first  iI.>«h  he  im  lu  le.l  all  of  Sche.lulo  A  {lanas,  li,,uses,  rent,  haryes 
mines,  ,|U.irri.-s.  nhinois,  fisheries,  an. I  pul.lie  ...nipanies  likr  railr.M.ls,  ean,il,  yas, 
ami  .loek  I  onipanies),  except  iniomes  from  mniiny  ailventurcs  ;  all  of  .Schedule  C 


l62 


The  Income   Tax 


i 

i 

\ 


\ 


\ 


i 


tally  he  referred,  in  an  interesting  passage,  to  the  nomenclature 
of  the  tax.  "The  existing  tax  is  called  the  property  and 
income  tax.  Why  it  is  so  called  is  not  apparent.  It  does 
truly,  in  many  instances,  tax  both  property  and  the  income 
arising  from  that  property,  but  it  is  not  probable  that  to 
declare  the  special  vice  of  the  tax  was  the  intention  of  its 
double  name.  Obviously,  however,  the  same  tax  should  not 
be  a  property  and  an  income  tax ;  and,  while  a  tax  on  the 
transfer  of  property  may  rightly  be  a  property  tax,  occurring 
as  it  would  at  intervals  of  many  years,  so  an  unnual  tax,  neces- 
sarily payable  out  of  income,  should  be  an  income  tax.'  ' 

Hubbard  submitted  a  report,  the  principal  features  of  which 
were  as  follows :  First,  a  proposal  to  make  net,  instead  of 
gross,  income  the  basis  of  assessment  of  the  tax ;  not  ascer- 
taining the  net  income  by  an  account  of  actual  outgoings,  but 
assuming  it  by  a  deduction,  founded  on  an  average,  from  cer- 
tain cla.-^ses  of  gross  incomes.  Second,  a  proposal  to  divide 
all  incomes  into  two  classes,  of  which  the  one  should  com- 
prise incomes  called  spontaneous,  and  the  other  incomes 
called  industrial ;  and  to  tax  the  former  upon  the  full  amount 
of  the  net  income,  and  the  latter  upon  two-thirds  of  that 
amount.  Third,  a  proposal  to  distinguish  in  certain  cases 
between  the  interest  of  invested  capital  and  the  repayment 
by  instalments  of  the  invested  capital  itself,  and  to  levy  the 
tax  upon  the  interest  entirely,  and  not  upon  the  paid  portions 
of  capita!.^ 

Mr.  Lowe  sul)niitted  a  contrary  report  in  which  he  took 
excei)tion  to  t!ie  theory  advocated  by  Mill  and  accepted  by 
Hubbard,  th.it  savin- s  ought  to  be  exempted  from  taxation. 
"  It  is  no  p.irt  of  tl)e  duty  of  the  .State,"  said  Lowe,  "to  give 
!>oinities  to  s.iviii:;',  or  to  lay  penalties  on  expenditure.     The 

fliuMic  securitiis  ;  .Svheiiulc  I),  sm  far  as  it  cimpriscil  hankiny,  trading,  and 
ii\,uuil'actiiriti>;  i>r'i|n'iiv,  furi'ii;n  irri'j.'frty  anl  sciurilics;  and  Silu'dule  E,  so 
f.ir  .IS  ll  iiuliid.-d  |M  iiM.Kis.  lii'Uistnal  imoines  w.uilii  tluis  i uni|irise  virtually 
till  ivlinle  iif  Sihrdulp  1)  C|'riilits  ■>f  iusim'ss  and  l'r.•fl•^^i.lM^^  lujjflher  with 
pr  .lits  from  mining  alventurrs  i  Sidu  dale  A  i,  farms  ;  "^..hi-dul'-  H:,  and  stipi.-nds 
(S.  hcdulo  I-:  1.  —  Set  A>/.  '7,  ill.,  j).  2.S.;. 

'  Ktpvfl,  ]i.  2S3.  -  /iV,',.>,',  |..  iii. 


The  Income  Tax  on   Trial,  iH^~iH62  163 

State  cannot  put  itself  in  the  position  of  individuals,  to  judge 
for  them  ;  and,  as  it  cannot  judge  whether  it  is  better  for 
a  man  to  save  or  to  spend,  it  ought  not  to  interfere.  .  . 
There  is  a  vice  of  saving,  as  well  as  of  spending.  Avarice  is 
as  odious  as  prodigality.  It  is  not  every  man  that  has  an 
opportunity  of  saving.  Saving  implies  .something  to  spare, 
after  satisfying  the  wants  of  the  year.  To  give  a  remission 
to  savings  is,  therefore,  to  give  a  remission  to  wealth."  i 
Northcote  proposed  a  draft  report  which  finally,  after  some 
slight  changes,  was  adopted  by  a  narrow  majority  as  the 
report  of  the  committee. 

The  report  mentions  the  three  complaints  popularly  di- 
rected against  the  income  tax,  namely  "  that  it  taxes  the 
owners  of  property  in  respect  of  income  which  they  do  not 
get ;  that  it  presses  too  hardly  upon  skill  and  industry,  as 
compared  with  property;  ami  that  it  deals  with  capital  in 
certain  cases  as  if  it  were  income,  and  taxes  it  accordingly. " 
It  then  proceeds:  "Your  committee,  however,  after  tujl 
consideration,  have  arrived  at  the  conclusion  that  the  pian 
proposed  by  their  chairman  does  not  afford  a  basis  for  a  prac- 
ticable and  equitable  readjustment  of  the  income  tax;  and 
they  feel  so  strongly  the  dangers  and  ill  consequences  to  be 
apprehended  from  an  attem])t  to  unsettle  the  present  basis  of 
the  tax,  without  a  clear  perception  of  the  mode  in  which  it 
is  to  be  reconstructed,  that  they  are  not  prepared  to  offer 
any  suggestions  for  its  amendment."  They  add  finally: 
"This  tax  having  nuw  been  made  thi-  subject  of  investigation 
before  two  Conmiittees,  ;ind  no  projxis.il  tnr  its  amendment 
having  been  found  satistattory,  your  (onimittoe  are  brou<;ht 
to  the  conclusion  that  the  objections  which  arc  urged  against 
it  are  objections  to  its  nature  and  essence,  r.ither  than  to  the 
particular  sh;ipe  which  has  been  given  to  it  " 

Many  years  later  Hubbard  stated  that  the  committee's 
report  had  iiecn  prearranged  by  the  government  ■^     However 


'  F I  fori,  p.  v\i, 

-'  "  In  »hc  f..r:ii.-.li.in  ..f  il 


I'.'iiiniillti'   I   li.i  1  ijri'al   ilili'u  ^^!li^■- 
l    i.  , ,.    .  .,   .  i .  ■ 1.. 


till'  <ilr^  li'n 
.;:.  1    .1,    1..  \\. 


164 


The  Income   Tax 


I 


■^  , 


J  |. »_ 


that  may  be,  Hubbard  was  ingloriously  dclcatcd,  and  thus 
the  second  attempt  to  reform  the  tax  came  to  an  cud. 

Notwithstanding  this  defeat,  the  echoes  of  the  controversy 
were  some  time  in  dyini^  away.  A  writer  in  a  leadin},'  review 
accepted  most  of  Hubbard's  arguments  and  declared  that 
"the  income  tax  must  be  reformed  before  it  becomes  peima- 
nent.">  M'Laren,  a  prominent  Scotch  merchant,  issued  a 
report,  containing  the  same  idea,  to  the  Edinburgh  Chamber 
of  Commerce,  which  adopted  it  in  February,  1862.*  On  the 
other  hand,  Sargant  was  won  over  to  the  side  of  the  oppo- 
nents, and  in  an  article,  the  theory  of  which  was  ;,till  based 
on  the  cost-of-service  principle,  retracted  his  former  admis- 
sions, and  demanded  t)n!y  a  uniform  abatement  of  ^icx)  on 
all  assessments."  Not  a  few,  however,  grasped  at  the  final 
sentence  in  the  rej)ort  of  the  Committee,  and  demanded  a 
repeal  of  the  tax.  Thus  a  writer  in  the  Quarterly  Review 
stated  that  "  experience  must  have  convinced  the  House  that 
the  farce  of  calling  the  income  tax  provisional  cannot  go  on 
much  longer.  The  decision  must  soon  be  taken  whether  the 
income  tax  is  to  be  exceptional  or  permanent.  They  must 
not  trust  that  its  mere  odiousness  will  destroy  it,  and  that 
Chancellors  of  the  Exchequer  will  ever  spontaneously  di.s- 
pen.se  with  so  convenient  a  substitute  for  .statesmanship.  It 
is  demoralizing,  in(iuisitorial,  intolerable.  .  .  .  lint  in  spite  of 
this,  unless  a  blow  be  struck  at  it  right  early,  this  generation 
will  not  sec  its  cikI."«  Hcil,  in  an  address  to  the  London 
Financial   Rctorm   Association,  suggested,  as  a  substitute,  a 

pulitiial  jurtii's  w,ic  ..ppusol  t..  nv.  names  I  N.il  |ir<.po'.t..l  hitc  striuk  out,  and 
r<-|)latc.|   l.y  thnsf  ,,l   111.11  un(.iv..uraiily  .iii.-itc  I  tu  \\iK  vn'\wr\  "  —  <;i,,,lstoHt  on 
the  l,„onu   r.i.x.  ,-t,  .      I,,,n.|.,n.  I.S.S^,  |..  i,,.      |,„  full  title  ««■  i  «/,-„,  pai;.-  175. 
'  ••  ImniMf   I'.u  Kci.iiin,"  'I  he  ll',>tmni,r,r  AVr ;.-(.,  v,  .1.  UsvJi.  (iS(,2>,  pp.  y;- 

127        S,-c  op.   |,.    1  I  |_ 

-  A>/i"/  /,.  r/'if  /Jin/'ii'x'!  I  'h:iitiher  of  Cmintfrcr,  fii-n^r<iii!^  .7  /ii;l  ,jnd  SimtU 
M'Je  0/ laving  on  Ihf  /n..'<iif  .nU  l'ro/<,rly  fnx.  ItvDuni.in  M'I.aren.  Kdin- 
hursh,  !St)2. 

'Wiliiatn  I.ucas  Nu>,>.\ril.  ••  At\  rniliscriniinatiii},'  Iimmic  Tax  Kiv..!isi.|orf.l," 
lournal ,  /  thf  Sr.:!,^.;u:!  S..,u/\.  v,.l.  wv  (  iXuj  1,  |).  ?  ?><■ 

'  •■  lh<  In,  ..m«-  I'ax  an.|  in  KivaU."  //„  i^Juarleriv  A'nint;  vul.  109  (1861), 
p.  J47. 


Tlie  JiiLvhii    /ax 


on    J  rial,   i,-ipi-iS62 


l6- 


ompan- 
-iced,  in 

itter.* 

ifK'  iently 

rr,.:  acci- 
X'>f',und 


land  tax.'  Hankey  declared  tha^  he  sidercd  it  "an  odious 
tax."*  Cobbett,  whu  chaiaclc' /y'/l  i;  .^  "a  hi^rhwayman's 
tax,"  desired  to  substitute  a  tax  (.^  ,>at.  ♦s  '  In  parliament, 
however,  the  idea  of  abandonini^  \-.r-  ii„  .m,  tax  was  grad- 
ually disappearing. 

In  his  budget  speech  of  iSfH.  r.larhto-  <•  a.i,.'      referred  to 
the  subject.     It  was  here  that  he  made  in-  -aui'.' 
son  between  direct  and  indirect  taxes,  in  w  n^'    ii 
a  statesmanlike  way,  the  relative  advantat,'e«  •>♦  ■ '-, 

"To  many  people  both,  as  is  natural,  apjKj- 
repulsive.  As  for  myself,  I  confess  that,  <.\viiiL' 
(lent  of  my  official  position,  rather  than  to  air  in; 
cause  of  discrepancy,  I  entertain  ipiite  a  differeiil  oj/'rt-'Ki. 
I  never  can  think  of  director  indirect  taxati(Hi  x'eirt  .v  f 
should  think  of  two  attractive  sisters,  who  have  :*"'  iiit" 
(luced  into  the  gay  world  of  London;  each  with  an  I'-jih- 
fortune  ;  both  having  the  same  parentage  (for  tht-  p; '^.i,  -  uf 
both  I  believe  to  be  necessity  and  invenli<in,  diffiTuiif  ..nh 
as  sisters  may  differ,  as  where  one  is  of  lighter  and  one  of 
darker  complexion,  or  where  there  is  .some  agreeable  variety 
of  manner,  the  one  being  more  free  and  open,  atid  the  other 
somewhat  more  sh\-,  retiring,  and  insinuating.  I  c.tnnot  con- 
ceive any  reason  whv  there  should  be  imfriendiv  rivalry  be- 
tween the  admirers  of  these  two  damsels  :  and  I  franklv  own, 
v.  lether  it  be  due  to  a  lax  si'ni.e  of  :noral  obligation  or  not, 
that  ;;s  Ciiancelior  of  the  Kxchecpier,  if  not  as  a  member  of 
this  Mouse,  I  have  always  thought  it  not  only  allowable. 
but  even  an  act  of  duty,  to  pay  my  addresses  to  them  both. 


*  /^/'r./  /".?  t*;.'/.'/;.  /  i-iri/''H  /'titfiri.  11/  l\t'forfn  !  .  i.i/t.  /i.  ('  ^'Tcrfirfi-' 
iitiJrficd  !■'  the  Mcn'n-^  ■•!  the  It',  •/nini  trr  Kr/^jni  i'::i'ii.  |!y  lani' -  IJc.il 
l.omlon.  iScij.  p.  II'. 

■^  Taxei  iiihi  /■-tf'nii/i/Hfei :  or  //ow  t'le  .!/,'«.  1  .  ,v(-  ,  u  :<:i  Iw.f  the  M^uey 
goei  out.     Hy  r!h.msiiii  lI.iMl,tv.     I.iiiJiiii,  iSi.|.  j..  jS. 

'  A  I ettei-  I,'  the  I'lhiii, e.'/.r  ,.,'/•:•,•  /  .,//,/.7.t  .  ;;  the  r,:'.:':  .-  ''•..';..;.'  .\feiit' 
of  Herr,    ll'iiie,   •ni.l    Tr.i  :     hiUini;  t>i,    .'/?/■.'    i.,'    T'ixe-   on   '■:  1  < .','  .V  ,   ,;«./ 

Sii/Htiti4le>  /oi  tlio-e  i'',i.\,'^  .iti.l  ,1.0  A"  the  /<;,,'<;■■,  /  ,;.i .  Ia  William  I  .'hlietl. 
1. .in. I. Ill,  iSt,;.  p.  2t>. 

*  CilaiisUjiu-,  /mail:  lilt   ■•i-alemenls,  y\>.  Jji.  242. 


1 66 


The  Income  Tax 


I  am  therefore,  as  between  direct  and  indirect  taxation,  per- 
fectly impartial." 

Going  on,  however,  to  discuss  the  remission  of  the  income 
tax,  Gladstone  took  no  uncertain  position.  "  I  should  like 
very  much,"  said  he,*  "  to  be  the  man  who  could  abolish  the 
inc«)me  tax.  I  do  not  abandon  altogether  the  hope  that  the 
time  may  come.  ['  Hear.']  I  can  assure  the  honorable 
gentlemen  that  I  am  not  about  to  be  too  sanguine,  for,  in 
finishing  the  sentence,  I  should  have  proceeded  to  quote  Mr. 
Sidney  Smith,  who,  in  his  admirable  pamphlet  upon  the  bal- 
lot, speaking,  I  think,  of  its  establishment,  or  of  something 
else,  as  of  a  very  remote  result,  says  he  thinks  we  had  better 
leave  the  care  of  this  subject  to  those  little  legislators,  who 
are  now  receiving  a  plum  or  a  cake  after  dinner.  I  am 
afraid  that  some  such  amount  of  self-restraint  may  be  nec- 
essary with  regard  to  the  income  tax.  ...  I  think  that  it 
would  be  a  most  enviable  lot  for  any  Chancellor  of  the  K.x- 
chequer  —  I  certainly  do  not  entertain  any  hope  that  it  will 
be  mine  —  but  I  think  that  some  better  Chancellor  of  the 
Exchequer,  in  some  happier  time,  may  achieve  that  great 
consummation  ;  and  that  some  future  poet  may  be  able  to 
sing  of  him,  as  Tennyson  has  sung  of  Godiva,  although  I  do 
not  suppose  the  means  employed  will  be  the  same, 

'"Ho  took  :i\vay  the  t.ix. 

And  built  himself  an  iviTlasting  name.'" 

Thus  came  to  an  end,  fur  a  time  at  least,  all  thought  of 
abandoning  the  income  tax. 

'  r.lailstutu',  ttnitittiil  Stattmtnti,  pp.  244,  245. 


CHAITI'lR   III 

The  Modern  Income  Tax  :  A  Half  Century  of  Achieve- 
ment, 1862-191 1 

§  I.    The  Uneventful  Decade,  iS62-tSj2 

As  we  have  seen  in  the  last  chapter,  it  had  proved  to  he 
impossible  to  abolish  the  income  tax  at  the  be};inninff  of  the 
sixties.  The  only  result  of  the  discussion  was  that  (iladstone 
contented  himself  knocking;  \ti.  off  the  rate.  During  the  nc.\t 
few  years  the  same  policy  was  followed.  The  tax  continued, 
but  the  increasint;  prosperity  of  the  country  made  possil)ie 
a  prof^ressive  diminution  in  the  rate.  In  1863  (Iladstone  re- 
duced the  tax  to  Ja.,  and  in  1864  to  &/.,  basing  his  action  on 
the  ground  that  the  country  might  soon  be  able  to  decide 
fairly  and  squarely  whether  it  desired  to  retain  the  tax  per- 
manently. "  For  it  is  very  undesirable,"  declared  he  in  1864, 
"that  the  income  tax  should  creej)  unawares  into  peri)etuity." 
In  1865  the  rate  was  reduced  to  ^li.,  a  reduction  which  in 
Gladstone's  opinion  made  the  reduction  of  the  tax  easy,  or  its 
extinction  practicable.  The  succeeding  years,  however,  with 
their  frequent  changes  in  ministry,  were  not  uniformly  pros- 
I)erous,  and  Ciladstone's  second  attempt  to  prepare  for  the 
extinction  of  the  tax  {)roved  a  failure.  Under  both  the  Con- 
servative and  the  Liberal  ministries  up  to  1874  the  income  tax 
was  continued,  now  at  a  higher  and  now  at  a  lower  rate. 

In  the  interval  from  1862  to  1874  several  minor  changes 
were  made  in  the  law.  In  1863  the  abatement  which  in  the 
case  of  incomes  between/:  100  and  ZiS"  •I'^l  t"-'<-""  allowed 
on  so  much  of  any  duty  ;->  tnight  exceed  the  rate  of  5^/., 
was  fixed  at  the  definite  figure  of  £<'yo,  and  was  now  made 
applicable  to  incomes  of  from  /  kx)  to  /  200.  Incomes  be- 
low £  100  were  as  before  totally  exempted.  In  1865  a  modi- 
fication was  made  iu  tiie  system  of  peimilting  deductions  in 

107 


168 


The  Income  Tax 


■I- 


Schedule  D  in  cases  where  the  actual  profits  for  the  year  fell 
short  of  the  profits  computed  on  the  average  system.     Sec- 
tion 133  of  the  act  of  1842,  following  a  similar  section  in  the 
old  law  i)f  1806,  had  made  general  provision  for  such  deduc- 
tion.    Taxpayers  were  permitted  to  avail  themselves  of  this 
privilege  when  the  actual  profits  for  the  year  turned  out  to  be 
less  than  the  average  profits  for  the  three  years  ;    but  the 
government  was  not  permitted  to  charge  more  in  the  reverse 
case.     The  [Tovision,  therefore,  was  so  one-sided,  and   had 
worked  so  unfairly  in  practice,*  that  the  taxpayer  was  now 
required  to  prove  not  only  that  his  profits  for  the  year  were 
less  than  the  sum  assessed,  but  that  they  were  less  than  the 
average  of  three  years,  including  the  year  of  assessment.     In 
other  words,  the  ta.xpaycr  was  compelled   to  show  that  his 
profits  for  the  year  were  abnormally  low.     Moreover,  the  re- 
duction was   limited  to   the  difference  between  an   average 
based  on  the   profits  of  the  three    preceding  years   and  an 
average  ba.sed  on  the  profits  of  the  year  of  assessment  and 
two  preceding  years.''     In  1866  permission  was  given  to  the 
concerns  mentioned  in  No.  Ill  of  Schedule  A  —  mines,  quar- 
ries, iron-works,  and  the  like  —  to  be  assessed,  if  they  pre- 
ferred, according  to  the  rules  of  Schedule  D.^     Practically, 
this  was  a  concession  to  mine  owners,  enabling  them  to  re- 
turn their  profits  in  one  sum  to  the  Special  Commissioners, 
instead  of   having   them   a.s.scssed  by   the   General  Commis- 
si(mcrs.*     In    1869  the  Valuation  (Metropolis)  Act  placed  the 
assessment  of  Schedules  .A  and  B  in  London  in  the  hands  of 
surveyors,  and   provided   for   a   quinquennial    valuation — a 
custom    that  was   subsequently  extended  to  the  rest  of  the 

'  y'f.  Krpnrt  of t'K  11,-piirtmfntU  Cummitlfc  en  the  Im   'iit  '/\ix,   l(K>5,  p.  xvii. 

■■'  2X1  ani  20  \wi..  ■  .   io,  Sfc.  d.  -i  2'}  ami  ,5o\'itt.,  c.  (6,  sec.  8. 

'  Sie  '1  -.Hh-h'it'  th  Afforlrf  the  Commissioners  ,1  /nliiii'i  A'.yfUHf  (|SS|),  p. 
78,  Ihis  i.r..vi>i,,it  «!•.  at  t'irst  hi-M  to  transfer  these  o.iucrns  Imin  Schedule  A 
t.i  >ih(aule  li;  liii>  in  iSSl  the  Unuit  nl  I.iinis  reverse. 1  the  ,le.  l>ioii  on  the 
j;ruiiiul  thai  nunc  w.>ul(l  lie  re.luceil  from  .i  live-year  tu  a  three-year  [.cri."i.  ami 
cjuarries  imrease')  li-  ma  sin^jle  vear  tu  a  ihrec-year  |.eri."l.  —  \>  hi.  h  ha. I  evi- 
•l>  nllv  n.,t  ''c.  ri  ..lit.  ni|.lali-.l.  '-i.-e  h.iwelj.  '! hf  Ads  KUatiiii^  to  thf  hifomt  l\ix, 
t)tli  eu.    liy   I'iiifr.       i.i.MUun,   I908,  p.  Si. 


The  Modern  Income  Tax,  isoj  /y/; 


169 


country.'  Another  net  of  the  same  year  abolished  the  quar- 
terly payment  of  income  t:ix  in  Scheiluies  A  and  H,  as  fixed 
by  the  law  of  1842,  and  converted  it  into  an  annual  payment, 
except  in  the  case  of  railways,  which  were  still  to  pay  in 
quarterly  instalii.ents.'^  In  1872  poundaj;c  —  remuneration 
to  officials  of  so  much  per  poured  on  the  assessment  was 
abolished,  and  replaced  by  fixed  salaries.''  In  the  same  year 
an  important  change  in  abatements  was  made.  The  limit 
was  now  extended  from  X200  to  j(,  300,  and  the  amount  of 
abatement  was  increased  from  X6oto  /,8o,  so  that  incomes 
below  j{,  ux)  were  wholly  exempt,  while  incomes  from  Xioo 
to  jCiOO  onioyed  an  abatement  of  jCHo.  In  1874  the  privi- 
lege granted  to  taxpayers  under  .Schedule  \),  who  •  ere 
assessed  according  to  a  three-year  average,  to  compound  for 
a  term  of  three  years,  was  withdrawn.* 

The  fejling  of  opposition  to  the  tax  was  now  gradua'ly 
diminishing,  although  it  had  indeed  by  no  means  disappeared. 
McCulloch,  for  instance,  in  a  new  edition  of  his  general 
treatise,  declared  his  repugnance  to  the  tax  to  be  unshaken.'' 
Scarcely  less  antagonism  was  shown  by  I'cto,  who,  after  a  long 
consideration  of  its  defects,  arrived  at  the  conclusion  that 
"the  tax  must  be  put  upon  a  footing  which  will  permit  of 
fair  as.sessment,  and  which  will  make  it  properly  productive 
to  the  revenue  at  a  moderate  rate  of  duty.  If  this  cannot  be 
done,  the  tax  must  be  abandoned.  It  is  too  oppressive,  too  ob- 
noxious, too  uneipial,  too  immoral  in  its  character  to  permit  of 
its  continuance."  "  In  the  same  way  Professor  Thorold  Rogers 
stated.  "  It  is  not,  I  believe,  possible  to  defend  an  income 
tax  either  on  the  grounds  of  equity  or  morality.""     Rogers 

•  ^2  an.l  u  Vict.,  c.  67.  "  iS  ai'l  .\'>  Vi.  t.,  c.  S2. 
3  3a  ati'l  3?  Virt.,  (.  14,  -icc.  8.  '   i7  ""'l  '.*<  '»i^'-.  ^-  ','''• 

■''  .1  'I'lfiilie  I'll  thf  /'rmn/'lts  ««</  /'r,i,li,^n'  In/In,  n,f  ,•/  im.ilinn  iind  lit, 
/■umiim;  Svitem.  liy  J.  K.  McCulloth,  y\  cil..  FMirilmri;!.,  iKi.f.  S(h  esp.  yy. 
I05-ln7,  Ilv  I  o- 

'■  7',ix,ifioH  Its  I.e-v  iiH'i'  I  xfi-Miiifii'f,  /''I't  •III'/  I  ii'-^rr  hfiiig  uii  l:n  !hi>  y 
iiitu  rur    IxutiHuil  J'olvv.      llv  Mr  >p.  MnrtoTl  I'-''         I  ■ -I  A-'U.  I  H(. ),  p.  Ha. 

•  ].  V.  rh..r^.l.l  K  /.-r^.  •■'  In  'h'-  '-^^'i^''  :>1  i"  '  i-"- »1  I  'cliiiitn.ns  of  the  \V.>r.l 
III.  ..III.-.       /   :,•  n,il  •!  /■':,   ■■^nl!l  ii,.l.    ■.  ,  v.i;    xiilll      |S03;,  [..   257. 


I70 


The  Income  Tax 


:  ^ 


declared  his  preferenco  for  a  |)i.>pcrty  tax.  Urquhart,  also, 
desired  the  aboiiti-m  of  the  tax,  siiRgestinK  that  it  be  replaced 
by  a  land  tax  coupled  with  a  house  tax ; '  and  Baxter  held 
that  the  feeling  against  the  iiicome  tax  was  held  in  check 
only  by  the  public  attachment  to  a  theory.  "  The  income 
tax  is  an  excellent  cxumple  of  ihe  love  of  the  British  nation 
fci  abstraa  principles.  It  is  founded  upon  two  —  the  great 
principle  of  Direct  Tax.ition,  so  strongly  advocated  by  finan- 
cial reformers;  and  the  still  greater  principle  of  Kcpiality  of 
Taxation,  so  dear  to  political  economists.  Yet,  if  the  income 
tax  should  be  the  test,  it  will  be  difficult  to  decide  which  of 
the  twain  is  the  most  cordially  hated  by  a  discerning  public."' 
The  opposition  reached  its  climax,  perhaps,  in  a  violent  pam- 
phlet published  in  1872,  and  written  in  the  interests  of  an 
Anti-Income  Tax  Association.  In  this  it  is  declared  that  "the 
income  tax  is  unequal  in  its  incidence,  is  vexatious  in  its 
operation,  atul  is  immoral  in  its  mode  of  a.s.sessments  and  in 
its  intiiience  on  tho.se  taxed."  ^ 

Notwithstanding  all  these  utterances,  however,  the  general 
sentiment,  which  was  slowly  gaining  ground,  was  expressed 
not  only  by  Sir  .Stafford  Xorthcute  in  1862,  when  he  stated  that 
"  the  income  tax  is  generally  reganKd  as  the  financial  reserve 
of  the  country,  which  should  be  kept  available  for  emergen- 
cies," <  but  especially  by  Noble  in  iSf);.  Noble,  after  showing 
how  the  administration  of  the  income  tax  was  being  imi)roved 
from  decade  to  decade,  declared  that  "the  income  tax  may  be 
regarded  by  the  unreflecting  with  aversion;  it  may  be  more 
agreeable  to  be  deceived  into  the  payment  of  taxes,  than  to 
meet  the  open  demand  of  the  tax  gatherer;  yet  unless  the 
facts  narrated  in  this  volume  are  imaginarv  uul  our  prosperity 

'  /hj/,xu,s  ,m  ■/■,!x<if,,<„.  /,.,,,/  „„,/  [mpfr,„t.  Hy  W.  Pollanl  Ur.iiihart. 
Ahcrilicn,  1X117,  |,|,.  kij^  10;. 

^  /■//,  T.ixali,',,  of  !i,f  Cntt.l  Ki,>f;/.<m.  l!v  K.  Dii.lUy  Haxttr.  I.oml  n, 
l86<),  p.  92. 

»  J/tt  Incomt  /-ax.  .1  AVt/  ,■  ,./  ,',  //i</.<n;  „«,/  A',w.v;/.c  /..<  //  /,',/<•,;/. 
To  -fhi,h  I!  „,Ufl„  h'.frnii  01  ,  J'.imf.'ilft.  "  h'.sisi  or  lie  Auiiif,/."  originally 
fuhli^hftiii  iSif,.     I  ,,n      n,  iS;-    ;i.  1  j. 

*   Txftnty  i'titrs  01  liiftii,i,il  /',),,-,  r,  ji.  j(,7. 


The  Modern  Income  Tax,  1862-1^11  171 

a  delusion,  the  question  naturally  arises,  whether  the  limits  of 
improvement  have  been  reached,  or  whether  it  would  not.  on 
every  consideration,  be  a  wise  and  statesmanlike  |)olicy  to  seek 
fresh  triumphs  in  a  field  in  which  such  laurels  have  been 
won.  Shall  we  dismiss  the  mijjhty  engine  of  such  undoubted 
advantajjes  from  the  public  service  ;  or  shall  we  endeavour, 
by  its  aid,  still  further  to  advance  the  |)rosperity  and  happi- 
ness of  the  community  ?  "  '  The  same  idea  is  elaborated  in  a 
second  work,  where  Noble  now  al-o  demanded  differentiation.^ 
I'erliaps  the  strongest  defence  is  made  in  a  third  work  by 
Noble,  published  in  1875,  in  which  he  tells  us  that  "  it  should, 
moreover,  never  be  forgotten  that  the  income  tax  is  the  great 
instrument  by  means  of  which  our  recent  national  prosperity 
has  been  accomplislu d."  He  adds  that  "this  tax  has  one 
great  and  transcendent  merit  in  com|)arison  with  the  taxes 
that  it  has  replaced;  it  does  not  hinder  the  creation  of  wealth, 
the  expansion  of  trade,  nor  the  development  of  manufactur- 
ing industry."  He  refers  scornfully  to  the  action  of  the 
Chambers  of  Commerce  in  "  demanding  the  repeal  of  the  in- 
come tax  which,  with  all  its  faults,  has  been  the  main  source 
of  the  great  prosjjerity  which  has  accrued  to  British  commerce 
during  the  last  twenty  years."-'  There  were  even  not  wanting 
writers  like  lUirt  who  were  .x)  enthusiastically  favorable  to 
the  tax  as  to  declare  the  distress  of  Kngland  between  1816 
and  1842  to  be  due  largely  to  the  abolition  of  the  income 
tax.*  Referring  to  the  fact  that  it  was  being  denounced  as 
an   inquisitorial   tax,  Hurt  added:    "As  a  matter  of  fact,  I 

'  /is,  III  f  fip  million,  /S^j-/Sfij.  A  A'lTint'  of  the  fiiuiii,i,)l  Cli.iiii^fs  of  that 
PerioJ  an,!  Ihfii  ///;./(  «/(>';  Knwnue,  r>-,i,le,  M,iiiiil',ului  es,  iiii,l  liiiployinent. 
Hy  Jfliii  Nolilf.     I.<in(li>n,  |S()7,  p.  1711. 

-  I  he  Queen's  I. ires-  An  /n,/uirv  int,>  the  A>»iiint, /ii,i,ten,e,  luui  /■eoititmi, 
A'e,ii/ts  I'/'  the  '/'.ix.itwn  ,1'  I'l,  i'nitiJ  K'ini;.i,ni.  Pn,;!  ,tn.l  hi,lire,t.  liy  [uhn 
Nolilc.     Ixjndon.  1S70,  ch.i|i.  17-22. 

'  Witional  / in,in,e  :  ,t  A'nien,  ,'t  the  l',,li,  1  ,,f  the  i.isr  /:,;i  /'.ir,'i,i>iients,  ,in,/ 
0/ tie  A'esulls  ,,/  M,!,:n  hi,.  ■!  f  ,i;ifl,iruui.  I'.y  Juliii  .N.ililo.  [..melon,  IVS75, 
pp.  226-22S.     (  /.  also  pp.   ;2S-;2i). 

*  The  ln,itien,f  ,•!  l\i.\,ilion  tin,/  Debt  en  /nJustry.  By  J.  Curney  liurt. 
I-onJon,  n.  il.  [1S71  ),  p.  4. 


MtCROCOfV  KESOIUTION   TBT  CHA«T 

(ANSI  and  ISO  TEST  CHART  No.  2) 


^     APPLIED  irvHGE 


16b3  East    Main    Str«t 

Rochester,    Np-w    York         U609        U5JV 

('16)    482  -  0300*  Phone 

(716)   288  -  5989  -  Fok 


172 


The  Income  Tax 


believe  our  neighbors  are  seldom  any  the  wiser ;  but  if  they 
were,  I  hold  that  so  long  as  in  every  centre  of  population 
there  exist  such  masses  of  abject  misery,  no  minister  of  a 
great  country  would  be  justified  in  regarding  such  an  argu- 
ment as  any  more  than  dust  in  the  balance."  * 


§  2.    The  Growing  Permanence  of  the  Tax,  i874-i8g4 

Notwithstanding  the  diminution  of  the  opposition,  however, 
a  final  effort  was  made  by  Gladstone  in  1874  to  abolish  the 
tax.     After  five  years  of  office  he  was  in  possession  of  a  large 
surplus  and  he  now  suddenly  dissolved  parliament,  going  to  the 
country  on  January  24  with  an  appeal  in  which  he  promised, 
if  returned  to  power,  to  abrogate  the  income  tax  once  and  for 
all.     The  tax,  he  thought,  had  been  borne  with  "exemplary 
patience,"  but  this  was  because  of  its  temporary  character, 
"  the  country  cherishing,  together  with  the  desire,  the  expecta- 
tion, the  hope  of  its  extinction."     And  its  extinction  Gladstone 
now  declared  to  be  possible:  "According  to  the  older  finan- 
cial tradition,  the  income  tax  was  a  war  tax.     For  such  a  pur- 
pose it  is  invaluable:  ...  At  a  sacrifice   for   the   financial 
year  of  something  less  than  four  and  one  half  million  pounds, 
the  country  may  enjoy  the  advantage  and  relief  of  its  total 
repeal.     I  do  not  hesitate  to  affirm  that  an  effort  should  now 
be  made  to  attain  this  advantage,  nor  to  declare  that  according 
to  my  judgment  it  is  in  the  present  circumstances  practicable." 
The  election,  however,  turned  only  partly  on  fiscal  ques- 
tions.    Moreover,  it  must  not  be  forgotten  that  the  Tories 
also  held  out  some  prospect  of  repealing  the  tax.     In  Dis- 
raeli's election  address  he  referred  to  "  the  diminution  of  local 
taxation,    and  the   abolition  of   the   income   tax  — measures 
which  the  Conservative  party  have  always  favored,  and  which 
the  Prime  Minister  and  his  friends  have  always  opposed."    In 
fact,  the  general  expectation  was  now   widespread  that  no 
matter  how  the  election  might  turn  out,  the  end  of  the  in- 
come tax  had  come.     The  Tiwis,  in  its  issue  of  January  26, 

*   Of.  rit.,  n.  6. 


The  Modern  Income   Tax,  1862-igii  173 

1874,  stated  :  "  It  is  now  evident  that  whoever  is  Chancellor  of 
the  Exchequer  when  the  budget  is  produced,  the  income  tax 
will  be  abolished." 

The  Liberals  were  overwhelmingly  defeated,  and  Gladstone 
regarded  the  defeat  as  the  definitive  end  of  the  movement  to 
repeal  the  tax.  Many  years  later  he  sought  to  explain  his 
action  at  this  time,  and  to  defend  himself  against  the  charge 
of  political  bribery  which  had  been  preferred  against  him  by 
Lecky.i  "Those  who  gave  the  promise  (in  1853),"  wrote 
Gladstone,  "believed  the  thing  they  promised  to  be  politic 
and  r  .:ht.  .  .  .  They  bound  themselves  to  get  rid  of  the 
principal  direct  tax,  and  none  but  the  nation  could  absolve 
them  from  the  attempt  to  fulfil  their  effort.  Public  exigencies 
postponed  for  fourteen  years  the  practical  acknowledgment 
of  the  obligation,  but  it  has  never  been  forgotten.  The  way 
had  been  carefully  prepared  by  the  ministry  of  1868  1874, 
through  successive  reductions  of  the  tax  from  8^/.  to  yi.  In 
1874,  for  the  first  time  since  1845,  the  opportunity  arrived. 
The  nation  had  its  opportunity  to  take  its  choice;  it  may 
have  been  wise  or  unwise,  but  it  was  made  by  competent 
authority.  The  result  is  told  in  our  present  expenditure  of 
ninety  millions.  What,  in  Mr.  Lecky's  mind,  is  a  basis  of  un- 
equalled political  profligacy  was,  in  prospect,  and  is  in  retro- 
spection, according  to  my  conviction,  the  payment  of  a  debt 
of  honour  and  the  fulfilment  of  a  solemn  duty."  2  Lccky  re- 
plied that  he  did  not  impugn  Mr.  Gladstone's  motives,  but 
that  bribery,  nevertheless,  was  the  nature  of  the  act.  "  He 
n  .t  excuse  me,"  Lecky  went  on  to  say,  "  if  I  add  my  opin- 
ion that  the  decisive  and  somewhat  indignant  rejection  of  his 
offer  by  the  constituencies  was  an  encouraging  sign  of  the 
sound  pohtical  morality  of  the  nation. "^ 

'  Lecky,  History  of  England,  vol.  6,  p.  300,  hail  saiil :  "N'o  mciikrn  statesman 
would  attempt  to  bribe  individuals  or  purchase  boroughs,  like  Walpole  or  like 
r»orth,  but  we  have  ourselves  seen  a  niini-.lcr  goinjj  to  the  country  on  the  promise 
that,  if  he  was  returned  to  office,  he  would  abolish  the  principal  direct  tax  paid 
by  the  class  which  was  then  predominant  in  the  constituencies." 

*  The  A'infUcnth  Century,  xxi  (i887~t.  p.  935. 
Lccky,  "  Mr.  Giaualoiic  and  the  Income  Tax,"  />'/</.,  vol,  xxii,  p.  54. 


174 


The  Income  Tax 


The  new  Chancellor  of  the  Exchequer  under  the  Tory 
ministry,  Sir  Stafford  Northcote,  in  introducing  his  budget, 
proposed  that  the  income  tax  be  continued  at  the  nominal 
rate  of  2d.  "Such  a  mighty  structure,"  said  he,  "as  that 
of  the  income  tax  was  not  to  be  allowed  to  be  thrown  down 
at  six  weeks'  notice."  He  did,  indeed,  intimate  that  the  tax 
would  expire  entirely  as  the  surplus  continued,  although  he 
stated  that  it  ought  to  be  kept  "ready  only  for  some  great 
emergency,  and  not  to  be  called  upon  for  trivial  occasions." 
As  a  matter  of  fact,  however,  the  surpluses  were  soon  dis- 
sipated, and  not  only  was  there  no  thought  of  abrogating  the 
tax,  but  the  government  and  the  country  virtually  abandoned 
the  idea  of  retaining  it  at  a  simply  nominal  rate.  The  con- 
sequence was  that  the  income  tax  was  now  utilized  from  year 
to  year  as  the  exigencies  of  the  budget  demanded,  and  be- 
came an  acknowledged  part  of  the  permanent  fiscal  system. 

The  belief  in  the  temporary  character  of  the  tax,  how- 
ever, died  hard.  In  1874,  after  the  election.  Professor  Levi 
stated :  "  Its  unpopularity,  its  uncertainty,  and  its  injustice 
are  a  sufficient  barrier  to  the  general  acceptance  of  the  tax 
as  a  permanent  branch  of  the  revenue,  and  it  is  wise  to 
accept  the  irrevocable  judgment  formed  of  the  tax  long  ago 
on  this  subject,  by  the  public  at  large,  and  the  dicta  more 
recently  pronounced  against  it  by  the  Rt.  Hon.  W.  E.  Glad- 
stone." '  Three  years  later  an  anonymous  author,  who  was 
now  becoming  somewhat  fearful  of  the  outlook,  placed  all 
the  responsibility  on  Gladstone.  "  No  one  more  than  he 
had  committed  himself  to  the  extinction  of  the  tax.  No  one 
had  done  so  much  to  prevent  that  extinction."*  Quoting 
t'le  petition  of  the  Hull  and  East  Riding  Anti-Income-Tax 
Association,  that  "  the  income  tax  ought  to  be  entirely  ex- 
cluded from  the  ordinary  revenue,  and  kept  as  the  fiscal 
reserve  for  which  it  was  designed,"  he  closed  his  appeal  by 


'  I.eone  Levi,  "On  the  Reconstruction  of  the  Income  and  Property  Tax,"  in 
Journal  of  the  Slalistical  Socitty,  vol.  xxxvii  (1874),  p.  169. 

'■^  Shall  the  Tax  he  rermatient  ?  By  the  author  of  Our  Deficient  Revenue  and 
the  income  Tax.     London,  n.  a.  [1877],  P-  9- 


The  Modern  Income  Tax,  1862 -igii 


175 


saying :  "  to  prolong  the  policy  of  the  last  dozen  years  is 
little  less  than  political  lunacy;  it  is  trifling  with  loyalty  and 
an  abuse  of  patience."  ^ 

In  1880  Gladstone  returned  to  power,  but  the  question  of 
the  abolition  of  the  income  tax  was  touched  upon  by  him 
only  once.  In  a  speech  of  April  25,  1884,  he  alluded  to 
the  action  of  the  country  ten  years  before.  "  The  matter 
was  referred  to  the  country  at  a  general  election.  They 
declined  the  offer  of  abolishing  the  ta.x  that  was  given  them, 
and  I  can  promise  that  a  sufficient  number  of  years  will  pass 
over  the  heads  of  Englishmen  before  they  will  have  another 
opportunity  of  abolishing  it."  Hubbard,  however,  gave  a 
more  adequate  explanation :  "  Mr.  Gladstone  has  not  ex- 
plained why  he  did  not  abrogate  the  income  tax  when  he 
resumed  office  in  1880.  The  reason  is  obvious:  neither  in 
1874,  nor  in  1880,  nor  in  any  later  year,  could  an  income  tax 
be  dispensed  with,  for  it  is  now,  as  a  substitute  for  indirect 
taxation,  the  only  means  of  taxing  classes  of  persons  who 
would  otherwise  escape  scot  free,  or  nearly  so."^  Thus  we 
can  thoroughly  agree  with  the  opinion  of  his  biographer  that 
"  in  all  these  divers  ways,  then,  while  Mr.  Gladstone's  dream 
was  to  repeal  the  income  tax,  his  fiscal  reforms  and  his 
financial  work  have  tended  to  make  it  permanent."  * 

While  Gladstone,  however,  found  it  impossible  to  repeal 
the  tax,  his  influence  sufficed  to  prevent  any  important  change 
in  its  constitution.  Hubbard,  despite  his  failure  in  1861,  had 
never  abandoned  his  cherished  hope  of  accomplishing  its 
differentiation.  In  1875  he  attempted  to  bring  the  matter  up 
again  in  parliament,  but  found  no  opportunity  to  deliver  his 
speech,  which  was  thereupon  printed  separately.*      In  this 

'  op.  at.,  p.  18. 

^  ClaJslotie  on  Ike  Income  Tax.  Discussion  of  the  Income  Tax  in  the  House 
of  Commons  on  2^th  .ifril,  iSS.f.  IVilh  Preface  ar  i  Historical  Sketch,  incluJin^ 
a  Proposed  Bill.     By  the  Rt.  Hon.  J.  (1.  Hubbani.     London,  1SS5,  p.  14. 

"  Mr.  Gladstone,  etc.     ISy  Sydney  liuxton.      London,  1901,  p.  135. 

*  local  and  Imperial  Taxation.  A  speech  of  the  Right  lloii.John  Gellihrand 
Hubbard,  M.P,,  the  Delivery  of -udtich  on  Tuesday  the  20th  of  July,  was  precluded 
by  the  Counting  out  of  the  House  at  9  P.M.     London,  US75. 


1/6 


The  Income   Tax 


speech  Hubbard  stated  that  the  official  returns  "furnish  a 
distressing  series  of  details  of  fraudulent  returns."     After 
citing  these  in  cxtcnso,  he  lamented  that  "  the  records  of  the 
Inland  Revenue  exhibit  so  frightful  a  picture  of  habitual  un- 
truthfulness and  fraud.'" »     He  ascribed  this  situation,  as  usual, 
almost  entirely  to  th^  lack  of  differentiation.     Others  agreed 
with  him.     In  1883  Haywood,  of  the  Council  of  the  Liver- 
pool Financial  Reform  Association,  read  a  paper  at  the  Social 
Science  Congress  at  Huddersfield,  reverting  to  the  old  idea 
that  the  tax  should  be  levied  on  property  alone.'^     Shortly 
afterwards,  the  former  Financial  Secretary  of  the  Treasury, 
Laing,  enunciated  "  the  broad,  simple  principle  of  observing 
a  distinction  between  earned  and  unearned  income,  and  mak- 
ing the  latter  pay  at  a  higher  rate."  ^    Finally,  in  1884,  Hub- 
bard returned  to  the  fray.      In  February  he   published  an 
article  reviewing  the  entire  history  of  the  subject.*     "  Peel's 
property  and  income  tax,"  he  tells  us,  "  survives  the  lapse  of 
forty-two   years.     Detested,  denounced,  and  doomed  again 
and  again  to  extinction,  it  has  crept  on  by  stages  of  three 
years,  of  seven  years,  but  mostly  by  yearly  renewals,  and 
its  continuance  now  stands  more  firmly  rooted  than  ever  as  a 
permanent  instrument  of  revenue."     In  April  he  found  an 
opportunity  in  the  House  to  repeat  in  substance  his  motion 
of  over  twenty  years  before.     But  Gladstone  replied  :  ^  "  The 
Right  Honourable  Gentleman  has  devoted  himself  to  this 
matter  with  a  chivalrous  loyalty.     He  began  upon  it  shortly 
after  his  entrance  into  Parliament,  now  more  than  twenty 
years  ago ;  and  I  believe  that  he  will  pursue  it  to  the  death. 
It  reminds  me  of  the  Crusades.     They  began  somewhere 
about  the  year  iioo,  and  they  continued,  at  intervals,  for 

'  op.  at.,  pp.  13-17,  24. 

-  Diretl  Taxation,  ami  ho~u 
pool,  18S3.     See  esp.  p.  ii. 

»  Taxation  and  Finance.     By  S.  I.aing,  fhairman  of  the  London  and  South 
Coast  Railway  Company.     Ixjndon,  n.  d.  [1883],  p.  14, 

^  J.  K'u  Hubbard,  "  Forty  Years  of  Income  Tax,"  National  Htview,  February, 
1884. 

^  Hansaid,  vol.  cflxvxvii,  n.  6*?''. 


it  may  be  appiieJ.     By  G.  K.  lia>-wood.     Liver- 


The  Modern  Income   Tax,  1862-1^11 


177 


about  two  and  one-half  centuries ;  and  if  the  condition  of 
human  life  permitted  the  Rij^ht  Honourable  (ientlcman  to 
extend  his  parliamentary  career  to  a  period  as  lengthened  as 
that  embraced  by  the  Crusades,  I  am  sure  that  at  the  end  of 
two  centuries  and  a  half  he  would  still  be  found  arguing  with 
undeniable  force,  and  all  his  clearness  of  demonstration  in 
favour  of  his  plan  for  the  reconstruction  of  the  income  tax." 

Gladstone,  indeed,  did  not  deny  the  inequalities  of  the 
tax.  "  I  do  not  contest  one  of  them,"  he  said.  "  I  make  a 
whole  armful  of  concessions  to  him.  I  will  not  accuse  him 
of  exaggerating  those  inequalities  ;  it  is  hardly  possible  to  ex- 
aggerate them.  '  But  he  stood  by  his  speech  of  1853,  and 
stated  that  he  agreed  with  every  important  official  of  the 
department  in  regarding  the  scheme  "as  a  wholly  visionary 
project,  though  no  doubt  philanthropic  and  benevolent  in 
intention,  and  as  absolutely  impossible  of  practical  apjilica- 
tion."  Hubbard  discussed  the  entire  episode  in  a  pamphlet 
the  following  year,^  in  which  he  accused  Gladstone  of  "  cyn- 
ical injustice  to  the  demoralizing  influence  of  an  unequal  and 
oppressive  impost,"  and  in  which  he  put  upon  Gladstone  the 
responsibility  of  "  intensifying  every  one  of  its  crying  anom- 
alies." He  concluded  with  the  statement  that  "the  futile 
pretexts  on  which  finance  ministers  have  resisted  the  adjust- 
ment of  the  tax  have  vanished."  *  Yet  such  was  the  glamour 
of  Gladstone's  name  that  it  took  another  two  decades  before 
the  force  of  these  "  futile  pretexts  "  was  overcome. 

In  the  twenty  years  following  the  change  in  the  law 
of  1874  mentioned  above,^  a  few  important  alterations  were 
made.  In  1876  the  limit  of  absolute  exemption  was  again 
raised,  this  time  to  /^I50,  and  an  abatement  oi  ^120  was 
granted  on  all  incomes  between  £\i,o  and  ^400.^  In  1878 
incomes  under  Schedule  B  were  allowed  such  deductions  for 
depreciation  and  for  the  wear  and  tear  of  machinery  and  plant 

1  For  full  title,  see  supra,  page  175,  note  2. 

-  Op.  (it.,  p.  16. 

'^  Snpiii,  page  169. 

*  jy  and  40  Vict.,  c.  16. 


178 


The  Income  Tax 


'i  -, 


as  the  Commissioners  might  think  "just  and  reasonable."* 
In  1880  the  Taxes  Manajjement  Act,  which  summarized 
and  reenacted  existing  administrative  [)rovisions,  introduced  a 
new  instance  of  appeal.  In  ail  cases  of  appeal  by  the  Gen- 
eral or  Special  Commissioners,  either  appellant  or  the  surveyor 
might  henceforth  require  the  Commissioners  to  state  a  case 
for  the  opinion  of  the  High  Court  on  que.stions  of  law. 
Further  appc  ;  might  then  be  taken  to  the  Court  of  Appeals, 
and  finally  to  the  House  of  Lords.^  The  same  law  authorized 
the  Hoard  of  Inland  Revenue  to  increase  the  number  of  Gen- 
eral Commissioners  from  seven,  as  fi.xed  in  the  year  1842, 
to  fourteen.^  In  1885  the  control  over  incomes  from  foreign 
and  colonial  securities  was  rendered  more  effective  by  including 
in  the  list  of  persons  intrusted  with  the  payment  of  such  divi- 
dends or  interest,  and  required  to  make  returns  to  the  govern- 
ment, dealers  in  bills  of  exchange  and  dealers  in  coupons  who 
purchase  foreign  coupons  from  any  one  excepting  a  banker.'' 
In  1887  it  was  provided  that  farmers,  i.e.,  persons  occupying 
land  for  purposes  of  husbandry  only,  might  henceforth  elect 
to  be  assessed  under  Schedule  D  instead  of  Schedule  B,  that 
is,  on  actual  profits,  instead  of  on  an  assumed  income.^  This, 
it  will  be  remembered,  had  been  a  source  of  complaint  as  far 
back  as  1808.^  In  1889  the  exemption  accorded  to  friendly 
societies  for  dividends  and  interest  under  Schedule  C  was 
extended  to  their  income  from  real  estate  under  Schedule  A.^ 
In  1890  an  important  alteration  as  to  losses  was  introduced. 
In  the  act  of  1842,  as  in  its  predecessors,  losses  could  be 
deducted  only  if  they  were  particular  losses,  whereby  the 
profits  of  the  business,  for  instance,  were  diminished.  Now, 
however,  where  business  men  or  farmers  assessed  in  Sched- 
ules D  and  B  sustained  a  general  loss,  i.e.,  a  loss  on  the  total 
result  of  all  business  operations,  they  might  secure  a  deduc- 
tion if  they  applied  within  six  months  after  the  year's  assess- 


•  41  and  42  Vict.,  c.  15,  sec.  I. 
'  43  anil  44  Vict.,  c.  19,  sec.  59. 
'  Sectiiin  28. 

*  48  and  49  Vict.,  c.  51,  sec.  26. 


'  50  and  51  Vict.,  c.  15,  sec.  iS. 

^  Cf.  siiprn,  p.ige  lod. 

'  52  and  53  Met.,  c.  42,  »cc.  12. 


i  I 


The  Modern  Income  Tax,  1S62  191 1  179 

nient*  In  1891  the  poundage  which  had  been  abolished  in 
1866  and  reintroduced  in  part  by  the  Taxes  ManaL;ement 
Act  of  1880  was  finally  done  away  with.''  It  was  hoped  in 
this  way  to  diminish  the  suspicion  on  the  i)art  of  the  public 
that  the  more  the  officials  could  extort  from  the  taxi)ayer, 
the  more  he  would  be  paid.  In  1.S93  so  much  of  the 
income  of  trade-unions  as  was  employed  for  benefits  was 
exempted  in  Schedules  A,  C,  and  D,  proviilcd  the  amount 
of  benefit  did  not  exceed  ^200  or  the  amount  of  annuity 
did  not  exceed  ^30.''  All  these  changes  tended  to  smooth 
away  some  of  the  existing  inequalities,  and  to  render  the 
machinery  of  the  tax  more  efficient  and  more  productive. 


§  3.    T/ie  Emergence  of  the  Nciucr  Problems,  iSg^-igo.f 

With  the  beginning  of  the  nineties  we  enter  upon  a  new 
and  modern  epoch  of  the  income  tax.  The  income  tax  in 
an  improved  form  had  been  adopted  in  Italy;  it  had  been 
practically  reformed,  and  was  becoming  a  vast  fiscal  resource 
in  Germany;  and  it  was  being  discussed  in  many  other  coun- 
tries as  an  engine  of  social  progress.  In  England  its  ad- 
ministration had  been  so  perfected  that  not  only  was  it  now 
generally  accepted  as  a  permanent  and  necessary  jiart  of  the 
revenue  system,  but  the  complaints  against  it  were  fast  dis- 
appearing. In  1 891,  indeed,  we  still  find  a  suggestion  that 
permission  be  given  to  the  taxpayers  to  buy  themselves  free 
of  the  income  tax  by  a  method  of  composition.^  Such  expres- 
sions of  opinion,  however,  were  now  becoming  rare.  Sir  John 
Lubbock,  who  at  one  time  had  vigorously  opposed  the  tax, 
now  stated  that  "we  must  rccogni/e  it  as  a  permanent  portion 
of  our  fiscal  system."''    Hlunden,  who  had  called  attention  to 

*  S3  and  54  Vict.,  c.  S,  si-c.  23. 

"  54  anil  55  Vict.,  c.  I  j  ;    an.l  55  and  56  \'iit,,  c.  25. 

'  56  and  57  Vict,  c.  2. 

^  ReJemption  of  the  Xntional  De''t  hy  L\>;iiposition  of  fita'iiu'  Tax.  Hy  R. 
Printed  for  private  circulation,     r.cin'lnn,  iSiii,  pp.  iS-ar. 

'Sir  John  Lubbock,  '•  I'h"  Income  Tax  ii  Knglinl,"  Xonh  American 
Kcvicu),  vol.  135  (I5y4),  p.  150. 


i8o 


The  Income  Tax 


the  undeniable  fact  that  the  income  tax  was  not  a  product  of 
theoretical  economic  science  [in  England],'  and  who  was  by 
no  means  blind  to  the  difficulties  involved  in  Schedule  D, 
explained  the  continued  existence  of  the  tax  as  due  to  its 
"merits  which  distinguish  the  income  tax  above  the  other 
taxes,  as  a  fiscal  resource  for  great  emergencies."  Hluiulen 
was  still  so  much  impressed  by  the  old  arguments  of  Sir  Staf- 
ford Northcote  that  he  defended  the  tax  chiefly  on  the  ground 
that  "  its  potentialities  for  the  hour  of  need  are  so  great,  so 
valuable,  and  so  unique,  as  to  justify  its  permanent  retention 
in  the  British  tax  list,  and  to  insure  perfect  readiness  and 
efficiency  for  the  emergency,  its  constant  -'se  at  a  minimum 
rate  is  indispensable."^  Public  opinion,  however,  as  we  now 
know,  had  by  this  time  advanced  beyond  this  position. 

The  real  problem  that  now  attracted  attention  was  not 
only  the  old  one  of  differentiation,  but  the  new  one  of  gradua- 
tion. Although  the  principle  of  progressive  or  graduated 
taxation  had  occasionally  been  advanced  in  Kngland  by  radi- 
ca'  ,  as  the  preceding  pages  have  shown,  it  had  been  uni- 
formly reprobated  not  only  by  all  English  statesmen,  but  by 
the  great  mass  of  important  British  thinkers.^  In  the  early 
eighties  Mr.  Labouchere  had  hinted  at  the  probability  of  a 
progressive  income  tax,*  only  to  have  it  criticised  by  a  com- 
mentator as  "a  preposterous  and  impossible  system  of 
finance."  5  Another  writer  maintained  that  such  a  scheme 
"  would  be  indeed  fatal  to  the  whole  spirit  of  our  commerce 
and  manufacturing  energy." «  A  gradual  change  was,  how- 
ever, coming  over  the  public  mind,  and  by  1894  the  Chan- 
cellor of  the  Exchequer,  Sir  William  Vernon  Harcourt,  de- 

'  G.  H.  Blundcn,  "I'hc  I'iSition  and  Function  of  the  Income  Tax  in  the 
British  Fiscal  System,"  The  J.,oiio»iic  Joicrnal,  vol.  ii  (iSya),  p.  642. 

^  Op.  cit.,  p]i.  65(1,  651. 

■'•  For  a  general  review  of  the  arguments,  see  Seligman,  Progressive  Taxation. 
2d  ed.,  1908,  Historical  .Appendices. 

*  "  A  Democrat  on  the  Coming  Democracy,"  Fortnightly  Review,  March,  t''.S3. 

'  The  Economist,  March  10,  1883,  p.  284. 

«  On  the  rmidence  of  ]\u(,ition,  as  affecting  Different  Classes  in  the  United 
ktugJan  a:  :':,:  :';\s,iit  Time,      liy  liuestigatui.      London,  laaj,  p.  23. 


The  Modern  Income   Tax,  1862- igii  181 


clared  himself  a  convert  to  the  new  doctrine.  Although  he 
applied  it  to  the  new  death  duties,  he  refrained  from  extend- 
ing the  principle  to  the  income  tax,  simply  on  the  ground 
that  he  did  not  yet  see  his  way  to  perfect  the  i)ractical 
details.  In  his  budget  speech  of  April  16,  1894,  he  conceded 
that  "in  principle  there  is  nothing  to  be  said  against  such  a 
system  ;  indeed,  there  is  every  argument  in  its  favor.  The 
difficulties  which  lie  in  its  way  are  of  an  administrative  and  a 
practical  nature,  which  as  yet  I  have  not  been  able  to  find 
means  to  overcome."  '  He  sought,  however,  as  far  as  possible, 
to  effect  a  part  of  the  scheme  by  an  elaborate  change  in  the 
system  of  abatements  and  exemptions.  He  proposed  to  fix 
the  limit  of  total  exemption  at  ;^  160 ;  to  have  incomes  between 
£i\(io  and  £,d,QO  receive  an  abatement  of  J[^  160;  and  to  have 
incomes  between  £^afiO  and  ;£^500 enjoy  an  abatement  oi  £\oo. 
The  act  of  1894  carried  out  these  recommendations,'*  and 
also  adopted  two  other  changes,  one  of  minor  and  one  of 
major  importance.  The  minor  alteration  was  the  exemption 
of  the  income  of  savings  banks,  chargeable  under  Schedules 
C  or  D,  so  far  as  this  is  applied  to  payments  of  interest  not 
exceeding  five  pounds  for  each  depositor.  The  important 
change  affected  Schedule  A.  It  had  long  been  complained 
that  real  estate  had  been  assessed  in  Schedule  A  at  its  gross, 
instead  of  its  net,  income.  Under  the  new  act  it  was  provided 
that  the  assessment  might  be  reduced  by  one-eighth  in  the 
case  of  farm  lands  with  buildings  thereon,  and  by  one-sixth 
in  the  case  of  other  buildings,  so  as  to  permit  deductions  for 
repairs.  This  was  recognized  as  at  once  a  substantial  con- 
cession to  the  landowners  and  a  decided  improvement  in  the 
theory  of  the  tax  itself.  Finally,  in  Schedule  B  the  charge 
was  now  equalized  in  the  whole  of  Great  Britain.  Up  to  this 
time,  it  will  be  remembered,  the  rate  of  duty  in  Schedule  B 
was  in  England  one-half  of  the  rate  in  Schedule  A,  and  in 
Scotland  and  Ireland  about  one-third.  Now  the  rate  was 
made  uniform,  being  fixed  for  the  year  at  ^d.  in  all  three 
countries,  as  against  8^/.  in  Schedule  A. 

'  Hansard,  1894,  p.  502.  '^  57  and  58  Vict.,  c.  30,  sees.  34-38. 


lS3 


The  Income   Tax 


The  statement  of  the  Chancellor  that  he  had  been  converted 
to  a  belief  in  the  abstract  principle  of  graduation  could  i.ot 
fail  to  start  a  notable  discussion.  Most  of  the  disputants 
were  inclined  to  a^'ree  with  the  Treasury  officials,  who  had 
summed  up  the  situation  in  1885  as  follows:  "With  regard 
to  the  inquisitorial  character  of  the  income  tax,  we  may  ob- 
serve that  under  the  present  system  the  evil  is  reduced  to 
a  minimum.  At  the  present  time  it  is  not  too  much  to  say 
that  under  Schedules  A,  H.  and  K  fraudulent  evasion  is  very 
difficult,  and  that  under  Schedules  C  and  D,  in  a  large  number 
of  instances,  no  temptation  to  fraud  exists.  ...  It  is  prob- 
ably owing  to  these  considerations  that  proposals  vhich 
have  been  made  from  time  to  time  for  a  graduated  income 
ta.x  have  never  been  received  with  favour  by  any  one  who 
has  had  a  practical  experience  of  the  working  of  the  case. 
A  graduated  inconic  tax  could  only  be  made  dependent  on 
personal  returns  of  incomes,  and  the  doors  would  thus  be 
widely  reopened  to  fraud." »  About  a  decade  later  Blunden, 
one  of  the  most  accomplished  ot  the  British  officials,  took  a 
similarly  conservative  view  of  the  situation,  and  summarized 
his  arguments  as  follows  :  — 

1.  "That  the  Britisli  income  tax  is  at  present  constructed  on  lines 
peculiarly  ill-adapted  fur  conversion  to  the  progressive  model,  owing  to  the 
very  Lirgo  extent  to  which  incomes  are  taxed  at  their  sources. 

2.  "That  its  conversion  would  involve  the  reconstruction  of  the  tax  on 
the  discarded  and  unscientiric  lines  of  direct  assessment  on  general  returns 
of  the  total  income. 

3.  "That  evasion  would  then  he  easy,  and  would  speedily  become  gen- 
eral.    The  tax  would  be  an  effective  instrument  of  national  demoralization. 

4-  "That  the  yield  of  th.  tax  would  be  very  little,  if  at  all,  enlarged  by 
the  chanj^e. 

5.  "  That  the  susKestions  made  for  attaining  (in  part)  the  desired  ends,  by 
a  considerable  extension  of  the  system  of  degressive  rates  are  impracticable."^ 

'  Tivent)-ei);lilk  Krport  of  the  Cominissiontrs  of  ller  Majtstfs  Iniand  Rtftnue. 
London,  1S85,  p.  %: 

^  «;.  II.  Hlundei.,  "A  Progressive  Income  T.-ix,"  The  l\onomii  Joitrnal,  vol.  v 
(1895),  p.  531.  Uhin.Ien  repiatd  virtually  the  same  artjument  six  years  later  in 
the  article  entitle,!,  "  Ihe  Kuture  of  the  Income  Tax,"  The  Economic  Journal, 
vol.  xi  (_iyoi  ),  esji,  p.  lOl. 


"Bm 


The  Atmiern  Income  Tax,  iS6i  igti  1S3 

Gotldard,  who  thought  that  the  chief  object  of  proprossive 
taxation  was  to  secure  the  additional  revenues  needed  tor 
putting  into  effect  the  new  scheme  of  old-age  pensions,  sug- 
gested in  preference  to  a  graduated  income  tux  a  very  high 
tax  on  income  from  investments  and  a  sonirwhat  lower  tax 
on  incomes  from  business.'  And  Hhiiukii  later  on  jjroposed 
that  the  income  tax  be  supplemeiiteil  by  a  tax  on  rent  and 
interest.*  It  was  reserved,  however,  for  James  Hums  to  pub- 
lish the  suggestion  which,  after  the  lapse  of  anuther  decade, 
was  to  bear  fruit.  In  an  article  written  in  1896,  in  which  he 
stated  that  "the  machinery  for  assessing  and  collecting  the 
income  tax  is  much  more  effective  to-day  than  fifty  years 
ago,"  he  advocated  what  he  called  "a  graduated  and  differen- 
tial scheme,"  and  he  here  advanced  the  idea  of  what  he  called 
a  super-tax.  "The  solution  of  the  difficulty  can  be  found  in 
the  retention  of  the  present  scheme  (of  stoppage  at  source) 
as  a  means  of  obtaining  the  first  quota  of  taxation,  and  by  the 
direct  super-imposition  of  a  graduated  tax  on  incomes  exceed- 
ing a  certain  sum  —  in  other  word.s,  by  a  combination  of  the 
direct  and  indirect  schemes."-' 

During  the  ensuing  decade,  however,  foreign  affairs,  and 
especially  the  South  African  War,  prevented  the  giving  of 
much  attention  to  the  problem,  and  the  government  contented 
itself  with  making  various  minor  changes  in  the  system.  In 
1896  assessments  in  Schedule  B  were  arranged  according  to 
a  relative  scale.  It  will  be  remembered  that  in  1894  the 
rates  in  Schedules  A  and  B  were  fixed  at  8r/.  and  j-Y.  respec- 


'  J.  G.  Guddard,  "Graduated  Taxaticm,"  liconomif  A'n'ieu',\>j\.  v  (181)5),  P-  37 
et  sei], 

'  "  .\  New  Property  Tax,"  '/'hf  F.ionomu  /oi4>n,i/,  vol.  vii     1S97),  p.  6io. 

'  Jimes  Hums,  ".\  Ciraduated  lnci>me  Tax."  Il'is/miiister  A'nieiu,  vt<^.  q\\\'\ 
(1896),  p.  565.  Whether  this  was  .oally  the  first  suj^};e»lii)n  of  a  super-tax  is 
a  little  doubtful.  In  Sir  Charles  Dilke's  report  to  the  Stlcet  Coinmittce  of  1906 
we  are  told  that  the  lioard  of  Inland  Kevrmu'  had  in  1S1JJ-1S04  advised  Sir 
William  Harcourt  ajjainst  graduatioM,  "after  examinin;;  a  proposal  f.r  a  su])er- 
tax  by  direct  assessment  on  all  persi.ns  havinj;  more  tlian  /"jcxxj  a  year."  He 
does  not  tell  us,  however,  by  whom  the  proposal  was  made  and  whether  the  word 
"super-tax"  was  used.     Cf.  Selecl  Cmiimi/te,'  on  the  Income  Ta.\,  190O,  ji.  xix. 


1 84 


The  Income  Tax 


I  ^: 


tively.  Now  it  was  provided  that  henceforth  the  annual  rate 
of  taxation  should  be  charged  upon  one-third  of  the  annual 
value  of  lands  chargeable  in  Schedule  B ;  that  is,  the  assess- 
able net  income  in  Schedule  B,  on  which  the  annual  normal 
rate  of  tax  was  imposed,  was  deemed  equivalent  to  one-third 
of  the  rent  or  annual  value.*  In  the  same  year  a  notable 
change  was  introduced  into  the  practice  by  executive  order. 
The  concession  made  by  the  law  of  1878  with  respect  to  the 
wear  and  tear  of  plant  and  machinery  in  Schedule  D  ^  was 
extended  by  a  letter  of  the  Chancellor  of  the  Exchequer  to 
the  Association  of  the  Chambers  of  Commerce,  in  which  it 
was  laid  down  that  "  where  a  claim  is  made  in  respect  of  the 
introduction  of  more  modern  machinery  into  a  factory,  no 
objection  is  to  be  taken  to  the  allowance,  as  a  deduction  from 
the  assessable  profits  of  the  year,  of  so  much  of  the  cost  of 
replacement  as  is  represented  by  the  existing  value  of  the 
machinery  replaced."  ^  In  1898  Sir  Michael  Hicks-Beach 
introduced  several  improvements.  In  the  first  place,  he  en- 
la  ged  the  system  of  abatements.  The  limit  of  complete  ex- 
emption still  remained  at  ;^i6o,  and  the  abatements  on 
assessments  from  £,\(iO  to  ;^4C)0  remained  at  £,\^.  But  a 
further  abatement  of  .;^I50  was  now  granted  on  incomes  from 
£^i,QO  to  ;£500,  an  abatement  of  ^120  on  incomes  frorr, 
£,^QO  to  ;£6oo,  and  an  abatement  of  J[,Jo  on  incomes 
from  ;^6oo  to  £700,  the  full  rate  to  be  levied  only  on  in- 
comes of  over  £700.  Furthermore,  it  was  provided  that  the 
deductions  in  Schedule  D  for  the  annual  value  of  business 
premises  should  not  exceed  the  amount  for  which  the  premises 
are  assessed  under  Schedule  A,  as  reduced  according  to  the 
law  of  1894.  Finally,  permission  was  given  to  either  party 
to  an  appeal  to  employ  a  barrister  or  solicitor.  In  1899  the 
last  "  Names "  Act  (designating  by  name  the  Land  Tax 
Commissioners  who  select  the  General  Commissioners)  was 

'  59  and  60  Vict.,  c.  28,  sec.  26. 
'^  Supra,  page  178. 

'  This  letter  is  printed  in  full  in  the  Report  of  the  Departmental  Committee  on 
Income  Tax,  Lon<Ion,  1905,  Appendix  V. 


The  Modern  Income  Tax,  iSdz-ign  185 

enacted;  1  and  after  1906  the  custom  arose  of  appointing  the 
Commissioners  by  reference  to  a  schedule  of  names  signed 
by,  and  deposited  with,  the  clerk  of  the  House  of  Commons, 
in  lieu  of  inserting  the  names  in  the  act  itself.^  The  same 
law  of  1906  also  abolished  the  property  qualifications  for  the 
Land  Tax  Commissioners,  thus  extending  still  further  the 
gradual  democratization  of  the  tax. 


§  4.    T/w  Departmental  Committee  of  1904 

With  the  return  of  peace  and  the  growing  insistence  upon 
the  social  as  well  as  the  fiscal  aspects  of  taxation,  the  govern- 
ment was  finally  induced  to  take  up  afresh  the  whole  matter 
of  differentiation  and  graduation.  In  1903  the  Chancellor 
of  the  Exchequer,  Mr.  Ritchie,  announced  his  intention  of 
appointing  a  committee  to  consider  the  question  in  all  its 
bearings;  but  in  1904,  when  the  committee  was  actually 
appointed,  provision  was  made  only  for  a  Departmental  Com- 
mittee. The  special  matters  referred  to  the  committee  were 
the  following :  The  prevention  of  fraud  and  evasion ;  the 
estimation  of  income  derived  from  copyrights,  patent  rights, 
and  terminable  annuities  ;  the  allowance  made  in  respect  to  the 
depreciation  of  estates  charged  to  capital  account ;  the  system 
of  computing  profits  on  the  three-year  average  ;  the  rules 
governing  the  recovery  of  overpayments;  and  finally,  the 
exemption  of  cooperative  societies. 

The  committee  was  composed  of  six  leading  officials  con- 
nected with  the  income  tax  admiristration  :  Messrs.  Ritchie, 
Primrose,  Buxton,  Bonsor,  Murray,  and  Cayler,  with  Mr. 
Llewelyn  Davies  as  secretary.  It  heard  a  large  number  of 
witnesses,  among  them  important  officials  like  Sir  Thomas 
Hewitt,  Mr.  Stoodley,  Sir  Francis  Gore,  and  Mr.  Walter 
Gyles ;  eminent  actuaries  like  Messrs.  Cockburn,  Carter,  and 
Blandford ;  prominent  bankers  like  Mr.  (now  Sir)  Felix 
Schuster,  and  various  representatives  of  mercantile  associa- 
tions. 


'  62  and  63  Vict.,  c.  24.     C/.  supra,  page  58. 


^  6  Edward  VII,  c.  52. 


1 86 


The  Income  Tax 


The  committee  began  its  sittings  on  June  7,  1904,  and 
made  its  report  in  June,  1905,  publishing  in  a  portly  volume 
the  report  proper,  the  minutes  of  evidence,  and  fifteen  valu- 
able memoranda  and  statements,  in  the  form  of  appendices.' 

The  report,  which  sums  up  the  testimony  in  these  respects, 
begins  with  a  short  account  of  the  methods  then  in  force  for 
assessments  in  Schedule  D.  At  the  commencement  of  each 
year  the  legal  assessor  for  the  parish  —  who  is  appointed  by 
the  General  Commissioners  of  the  district  — prepares  a  list  of 
all  persons  whom  he  considers  properly  liable  to  assessment 
under  Schedule  D,  and  issues  to  each  a  form  of  return. 
Persons  coming  into  the  parish,  even  though  they  have  no 
ostensible  income  under  Schedule  D,  also  receive  a  form;  and 
if  no  liability  is  disclosed,  the  process  is  repeated  every  three 
or  five  years.  Employers  are  required  to  furnish  a  list  of 
persons  in  their  employ,  and  a  return  is  then  issued  to  each 
of  these.  General  notices  are  also  posted  on  the  church 
doors.  If  the  return  form  is  not  sent  back  in  due  course, 
another  notice  is  sent.  The  assessor  makes  out  the  list  of 
all  persons  to  whom  the  forms  have  been  sent,  stating 
whether  they  have  been  returned  to  him,  and  giving  his 
estimate  of  the  asscssal)le  income,  where  the  return  has  not 
been  made.  From  this  list,  submitted  about  July  20,  the 
clerk  to  tho  General  Commissioners  prepares  the  assessme.it, 
adding,  for  purposes  of  comparison,  the  particulars  for  each 
of  the  past  three  years.  This  takes  considerable  time,  as  the 
commissioners'  books  in  the  City  of  London  alone  are  no  less 
than  two  hundred  and  twenty  in  number.  The  assessment 
is  then  delivered  to  the  surveyor  of  taxes,  who  checks  the 
returns,  sends  a  further  application  to  those  who  have  mad'^ 
no  returns,  institutes  inquiries  as  to  the  returns  in  doubtful 
cases,  and  adds  whatever  det.  is  may  have  come  to  his 
knowledge  for  the  information  of  the  Additional  Commis- 
sioners.    The  Additional  Commissioners,  who  are  appointed 

'  Kefort  of  the  Pef'tirtmenlnt  Committee  on  Imome  Tax.  I.c.ndon,  19O'. 
(C(l.  2575.)  Ai'-petuii.x  to  the  h'cj-ort  of  the  Departmental  Committee  on  Income 
J  .X  with  Minutes  of  lUideme  taken  before  the  Committee,  1005. 


The  Modern  Income   Tax,  1862-igii  187 

by  the  General  Commissioners,  then  hold  meetings,  begin- 
ning about  the  end  of  August,  which  are  attended  by  the 
surveyor,  and  settle  upon  an  assessment  which  they  consider 
correct.     The  Additional  Commissioners  are  selected  as  pos- 
sessing expert  knowledge  of  separate  classes  of  trade  and 
commerce.     Their  character  may  be  inferred  from  the  fact 
that  Sir  Felix  Schuster  is  one   of  the  Additional  Commis- 
sioners for  the  City  of  London.     The  work  of  the  Additional 
Commissioners  in  London  is  most  elaborate,  and  they  form 
themselves  into  committees,  sitting  three  times  a  week  drring 
the  whole  of  the  latter  part  of  the  year,  with  all  the  surveyors 
present,  giving  the  benefit  of  their  knowledge  and  experience. 
They  then  deliver  these  assessments  to  the  General  Commis- 
sioners who,  after  fourteen  days,  cause  notices  to  be  issued  to 
the  persons  assessed,  giving  the  date  of  the  meeting  fi.\cd 
to   hear  appeals,  with  instructions  as   to  the  course   to   be 
followed.     The    notices  of   appeal    must    be    given    to    the 
surveyor   ten  days   before   the   date  fi.xed  for  hearing,  and 
accounts  or   other   evidence   in    support   of   any  objections 
made  by  the  taxpayer  must  be  furnished  to  him  before  the 
meeting.     The  evidence  is  examined  by  the  surveyor,  who  in 
a  large  number  of  cases  interviews  the  appellant  and  settles 
the  matter,  the  settlement  being  submitted  to  the  General 
Commissioners   for   their   approval.      Where,    however,   the 
appeal  meeting  takes  place,  the  surveyor  attends  and  sup- 
ports the  assessment  made  by  the  Additional  Commissioners. 
The  General  Commissioners,  after  hearing  the  evidence,  fix 
the   liability.     From    this   determination  there  is  no  apj^cal 
on  questions  of  fact,  although  an  appeal  is  allowed  to  the 
high  court  on  questions  of  law 

There  are  some  complicated  cases  which  cannot  be  settled 
in  time,  and  accordingly  belated  assessments,  or  first  addi- 
tional as.sessments,  are  presented  by  the  Additional  Commis- 
sioners as  late  as  the  5th  of  April  in  the  following  year.  In 
order  to  provide  for  still  further  omissions  which  may  be 
ascertained,  a  second  additional  assessment  may  be  made  not 
later  than  the  5th  of  Au<riist  of  the  second  vear.     At  that 


1 88 


Tlie  Income   Tax 


time  the  power  of  the  commissioners  to  make  any  assessment 
of  their  own  initiative  expires.  Nevertheless,  under  a  special 
provision,'  the  surveyors  of  taxes  still  have  power  for  a 
period  up  to  the  5th  of  April  of  the  followinjj  year,  of  sur- 
charging or  making  a  supplementary  charge  in  respect  to  all 
cases  that  have  not  been  brought  into  charge  in  the  commis- 
sioners' assessments.^  It  must  also  be  remembered  that  any- 
body who  is  assessed  in  Schedule  U  may,  if  he  so  desires,  be 
assessed  by  Special  Commissioners,  instead  of  the  local  com- 
missioners of  the  district.  Considerable  advantage  is  taken 
of  this  provision,  but  the  procedure  is  virtually  in  all  other 
respects  the  same.  We  arc  told,  however,  that  the  surveyors 
make  no  "vexatious  demands,"'*  and  it  is  not  entirely  settled 
whether  the  commissioners  have  the  power  of  inspecting  the 
books.  The  officials  inform  us  that,  smce  a  recent  decision 
in  which  the  question  was  indirectly  involved,  they  have  no 
difficulty  in  getting  at  the  books  in  case  of  necessity.  The 
law,  however,  does  not  explicitly  give  the  power  to  call  for 
books,  and  the  point  has  never  been  directly  decided  by 
the  courts.*  In  the  case  of  appeals,  the  commissioners 
can  insist  upon  the  submission  of  schedules  of  particulars, 
which  practically  amount  to  profit  and  loss  accounts ;  and 
if  the  appellant  desires  to  make  good  his  claim  for  a 
reduction,  he  must  produce  his  books.  The  accounts  of 
business  firms  are  now  usually  prepared  by  professional 
accountants. 

Before  taking  up  the  question  of  fraud,  which  was  the 
chief  concern  of  the  committee,  we  shall  devote  a  few  words 
to  the  other  points.  As  re  -ds  the  treatment  of  income  de- 
rived from  copyrights,  pa  ,hts,  and  terminable  annuities, 
the  committee  substantially  neld  that  the  existmg  methods 
were  unexceptionable      They  also  decided  that  there  was  no 


'  Taxes  Manaifoment  Aot,  iSSo,  sec.  63. 

^  Report,  pp.  iv,  v ;   A/'/'ciiJix,  pp.  xxx,  xxxi,  anil  pp.  Ixxix  et  uq. 

•  Evidence,  p.  loi. 

♦  Evidetue,  pp.   2;,  24,  and  100.     In  the  Income  Tax  Report  of  1906,  quote.' 
below,  this  matfir  is  further  explained  on  p.  25. 


The  Modern  Income   Tax,  1 862-1  gii 


189 


reason  for  changing  the  law  with  reference  to  the  exemption 
of  cooperative  societies.  Finally,  they  declared  themselves 
as  ill  the  main  satisfied  with  the  system  in  vogue  as  to  repay- 
ments for  exemptions  and  abatements.  Counselling  only 
some  slight  changes  in  the  forms  for  this  purpose,  they  made 
one  important  recommendation,  namely,  that  the  grant  of 
exemptions  and  abatements  should  be  abolished  in  the  case 
of  persons  residing  outside  of  the  United  Kingdom  ;  for  this, 
as  we  shall  see,  had  led  to  considerable  fraud. 

The  question  of  allowance  for  depreciation  gave  them  a 
little  more  difficulty.  It  will  be  remembered  that  the  acts  of 
1842  and  1853  allowed  the  actual  cost  of  repairs,  but  made 
no  provision  for  depreciation.  The  practice,  however,  grad- 
ually became  more  liberal  than  the  letter  of  the  law,  which 
was  interpreted  to  include  renewals ;  and  in  certain  cases, 
especially  in  regard  to  ships,  allowances  were  made  which  to 
some  extent  admitted  of  the  writing  off  from  profits  of  certain 
amounts  toward  replacement.  In  1878  this  practice  was 
specifically  recognized  by  law.  But  the  interpretation  of  the 
new  law  was  never  very  clear,  although  it  gradually  became 
more  liberal.  Thus,  in  the  case  of  ships,  a  fi.xed  allowance 
of  four  per  cent  on  the  prime  cost  of  the  vessel  was  permitted 
as  a  deduction  from  annual  profits.  In  the  case  of  printing 
machinery,  no  precise  scale  of  allowance  was  laid  down,  but 
wc  are  told  that  "considerable  progress  has  been  made  in 
esv  -blishing  typical  rights  of  allowances  on  different  classes 
of  nachinery."*  The  amount  of  income  exempted  on  ac- 
count of  wear  and  tear  thus  grew  from  a  little  more  than 
four  millions  sterling  in  1893-1894  to  almo.st  twelve  and  three- 
quarter  millions  in  1902 -1903.  The  concession  in  the  act  of 
1878  was  still  further  developed  bv  administrative  action  in 
1879,  when,  by  order  of  the  Chancellor  of  the  Hxchequer, 
it  was  decided  that  "  where  a  claim  is  made  in  respect  of  the 
introduction  of  more  modern  machinery  into  a  factory,  no  ob- 
jection is  to  be  taken  to  the  allowance,  as  a  deduction  from 
the  assessable  profits  of  the  year,  of  so  much  of  the  cost  of 

'  hee  Ktfoit,  AppenrliN  4. 


I90 


The  Income  Tax 


replacement  as  is  represented  by  the  existing  value  of  the 
machinery  replaced."'  The  committee  pointed  out  that  no 
very  definite  steps  had  been  taken  by  any  one  to  make  this 
matter  public,  and  that  most  people  seemed  to  be  ignorant 
of  it.  They  concluded,  however,  that,  with  due  publicity,  the 
existing  law  and  practice  would  suffice.  Finally,  it  will  be 
remembered  that,  in  1894,  a  deduction  of  one-sixth  from  the 
rack-rent  value  of  buildings  had  been  authorized  as  an  allow- 
ance to  cover  maintenance  and  repairs.  It  was  supposed 
that  this  allowance  was  intended  to  include  the  eventual  re- 
placement of  buildings.  The  act  of  1898,  however,  had 
directed  that  in  estimating  the  amount  of  profits  for  the  pur- 
poses of  Schedule  D  only  the  net  amount  assessed  under 
Schedule  A,  instead  of  the  full  annual  value,  should  be 
allowed  as  a  deduction.  The  allowance  for  wear  and  tear  of 
buildings  was  thus  limited  to  actual  expenditure  for  repairs. 
The  committee  now  decided  that,  in  view  of  the  fact  that  the 
amount  of  wear  and  tear  of  mills,  factories,  etc.,  greatly  ex- 
ceeds that  of  buildings,  the  full  annual  value  of  the  premises 
so  occupied  should  be  allowed  as  a  set-off  in  computing  the 
liability  under  Schedule  D,  instead  of  being  restricted  to 
five-sixths.^ 

The  next  point  discussed  was  the  question  of  the  three- 
year  average  system.  This,  it  will  be  remembered,  applied 
in  general  to  incomes  under  Schedule  D,  and  also  to  the  so- 
called  variable  and  uncertain  incomes  in  Schedules  A  and  E. 
The  income  thus  ascertained  by  average  is  termed  the  statu- 
tory income,  as  opposeu  to  the  actual  income.  Statutory 
income  is,  as  a  rule,  computed  on  a  three-year  average,  but 
the  profits  of  mines  are  computed  on  a  five-year  average, 
while  railvvays,  iron-works,  gas-works,  quarries,  and  a  few 
other  concerns  are  charged  on  the  amount  of  profits  in  the 
preceding  year.  The  average  system,  as  we  know,  was  first 
applied  to  Schedule  D  in  the  case  of  trade  in  1842.  It  was 
extended  to   provisions,  employments,  and  vocations   under 

'  Cf.  supra,  page  1 84. 

-  Cf.  uii  lliis  whole  subject,  Report,  pp.  xiii-xv,  and  Appendix,  p.  xxxviii. 


The  Modem  Income  Tax,  1862-1Q11  191 

Schedule  D  by  the  act  of  1853,1  and  it  was  thereafter  allowed 
by  practice  in  the  case  of  subordinate  officers  under  Schedule 
E.  It  might,  however,  happen  that  when  profits  were  falling 
off,  the  actual  profits  in  the  year  of  assessment  would  be  less 
than  those  which  would  be  worked  out  on  the  average  system. 
Accordingly,  section  133  of  the  law  of  1842  provided  that 
when  the  actual  profits  fell  short  of  the  sum  assessed,  they 
might  be  substituted  for  any  estimate,  whether  based  on  the 
preceding  year  or  on  an  average  of  years.  This  section, 
however,  proved  to  be  so  one-sided  that  it  was  amended  in 
1865.  The  taxpayer  was  now  required  to  prove,  as  a  condi- 
tion precedent  to  any  relief,  not  only  that  his  profits  for  the 
year  were  less  than  the  sum  assessed,  but  that  they  were  less 
than  the  average  of  three  years,  including  the  year  of  assess- 
ment. It  al.so  restricted  the  amount  of  relief  to  the  difference 
between  an  average  based  on  the  profits  of  three  preceding 
years,  and  an  average  based  on  the  profits  of  the  year  of  assess- 
ment and  two  preceding  years.'''  This  system  gave  rise  to 
many  anomalies,  and  led  to  a  serious  loss  of  revenue  to  the 
government.  The  shortcomings  are  fully  set  forth  in  a  memo- 
randum by  Sir  F.  Gore.^  He  took  five  cases,  assuming  that 
the  firms  originally  paid  taxes  for  the  same  year  upon  the 
same  average,  namely,  ^10,000;  that  the  total  profits  for  the 
three  years  were  in  each  case  jC  30,000 ;  and  that  the  actual 
profits  of  each  firm  during  the  year  of  assessment  were 
jC  SOOO.  Yet  according  to  the  law  one  firm  would  receive 
back  nothing,  while  the  others  would  receive  back  respectively 
the  tax  on  ^^333,  ^833,  i;i666,  and  ^3333.  It  is  no 
wonder  that  section  133  is  characterized  as  producing  "t'le 
most  capriciously  unequal  and  unfair  results  among  individual 
taxpayers."  He  also  emphasized  the  fact  that  it  afforded 
temptations  to  make  untruthful  returns,  and  that  it  placed 
additional  difficulties  in  the  way  of  detecting  false  returns. 
Following  his  advice,  therefore,  the  committee  recommended 

*  C/.  supra,  page  1 54. 
'^  Cf.  supra,  pnec  168. 

•  Appendix  7,  pp.  22-30. 


19^ 


The  Income   Tax 


that  section  133  of  the  act  of  1842,  as  well  as  the  section  in 
question  of  the  act  of  1865,  be  repealed. 

The  committee,  furthermore,  went  into  the  general  question 
of  the  average  system  and  summed  up  the  arguments  for  and 
against.  They  stated  that  if  the  country  were  starting  ik  novo, 
they  would,  on  the  whole,  counsel  the  rejection  of  the  average 
system,  largely  for  the  reason  that  when  his  profits  are  di- 
minishing, the  taxpayer  is  each  year  paying  the  tax  on  more 
than  the  profits  then  earned,  and  this  at  a  time  when  he  can 
least  well  afford  it.  Other  reasons  were  also  advanced  against 
the  system.  The  committee  decided,  however,  inasmuch  as 
the  three-year  average  system  had  been  in  force  for  over  sixty 
years  and  had  on  the  whole  given  rise  to  but  little  complaint 
and  since  any  change  would  necessarily  lead  to  some  tempo- 
rary confusion  and  distress  and  might  be  unpopular,  that  un- 
less a  very  decided  public  sentiment  to  the  contrary  should 
be  manifested,  they  would  recommend  no  further  change. 
Thus  the  average  system  was  substantially  upheld.  This 
brings  us,  then,  to  the  chief  discussion  of  the  whole  investi- 
gation, namely,  that  of  fraud.  This  point,  however,  is  so 
important  that  it  merits  a  separate  section. 


§  5.    The  Question  of  Fraud 

As  an  introduction  to  this  discussion,  the  committee  called 
attention  to  the  fact  that  "  the  feeling  formerly  entertained 
against  the  income  tax  system  as  inquisitorial  and  oppressive 
has,  we  believe,  largely  died  away.  The  impartiality  and 
secrecy  of  the  local  Commissioners  deserve  and  obtain  public 
confidence  in  a  high  degree."  But  the  committee  made  no 
attempt  to  deny  the  fact  that  there  was  still  "a  substantial 
amount  of  fraud  and  evasion."  In  their  opinion,  however, 
this  was  true  of  only  a  small  part  of  the  operation  of  the  act. 
They  estimated,  on  the  basis  of  the  Inland  Revenue  memo- 
randum, that  something  like  four-fifths  of  the  income  tax  is 
either  assessed  at  the  source,  or  subjected  to  other  special 
methods    uf    verificution ;    and    they  stated    that   the  sphere 


The  Modern  Income   Tax,  iH62-iyn 


'93 


within  which  evasion  can  take  place  has  been  still  further 
circumscribed  by  the  rapid  conversion  of  private  business  into 
public  companies  and  by  the  operation  of  the  act  of  1885, 
which  provided  for  the  deduction  and  payment  of  income 
taxes  from  foreign  investments  by  bankers  or  dealers.  There 
is  still  left,  however,  a  sphere  in  which  self-assessment  is 
requisite,  and  it  is  in  this  sphere  that  the  committee  state 
that  while  they  cannot  attempt  a  quantitative  estimate,  they 
have  no  doubt  that  the  loss  of  the  revenue  is  serious  enough  to 
demand  some  change  in  the  law.'  In  the  evidence  we  find 
somewhat  conflicting  statements.  Thus  Mr.  Stoodley  main- 
tained that  "  the  department  is  in  possession  of  evidence  show- 
ing that  grossly  insufficient  returns,  or  no  returns  at  all,  are 
made  over  long  periods  of  years,  with  impunity,"  and  he  con- 
tended that  the  powers  of  the  department  to  cope  with  fraud 
were  inadequate.^  In  another  place,  however,  he  stated  that 
he  did  not  think  there  was  as  much  fraud  and  evasion  as  was 
generally  believed.  He  considered  that  at  worst,  out  of  a  total 
gross  income  in  1 901 -1902  of  eight  hundred  and  sixty-seven 
millions  sterling,  there  was  appreciable  room  for  evasion  in  only 
one  hundred  and  fifty  millions.^  Sir  Thomas  Hewitt  stated 
in  his  memorandum  that  in  his  opinion  "the  number  of  cases 
of  actual  fraud  (excluding  cases  of  mere  evasion  and  mistaken 
views  of  accounts)  are  not  very  extensive,  but  there  are  cer- 
tain cases.  These  cases  have  sometimes  run  to  very  large 
amounts."*  The  Right  Honorable  C.  T.  Ritchie  stated  that 
"it  is  a  matter  of  common  knowled:i:t.-  that  evasions  of  income 
tax,  payable  under  Schedule  D,  arc  of  very  frequent  occur- 
rence."'^ Mr.  (now  Sir)  F"elix  Schuster,  one  of  the  Addi- 
tional Commissioners  and  a  prominent  banker,  thought  that 
"speaking  for  the  City  of  London,  it  may  be  said  that  on  the 
whole  the  returns  are  very  fairly  and  honestly  made."  But 
he  thereupon  proceeded  to  give  an  experience  of  his  own, 
which  deserves  to  be  quoted  in  full :  "  One  of  the  surveyors 


*  Report,  p.  V.  '^  Appfn.iix,  no.  I.  '  E-iJenci, 

*  Af'ptii.H.x,  no.  8,  pp.  .32-3.? ;    with  interesting  t\ainiilcs. 
'  Evideiuf,  p.  113. 

o 


S2-S3. 


194 


The  Income  Tax 


came  to  the  commissioners  and  said  :  '  Here  is  Mr.  So-and-So, 
who  never  sends  in  a  return.  We  have  assessed  him  at  X300 
a  year  for  the  last  two  or  three  years,  and  he  has  always  paid 
on  his  ^300.  Uon't  you  think  that  we  might  put  him  up 
now?'  The  Chairman  said,  *  Yes,  I  do.'  He  said,  'Well, 
what  shall  we  call  it.'  What  would  you  put  it  at  —  ^{[4,000 
or  ^5,000.''  The  Chairman  said,  'No;  make  it  ^50,000.' 
He  happened  to  know  something  about  the  man,  who  paid 
without  a  murmur."* 

One  official  witness  divided  the  chief  examples  of  fraud 
into  four  classes:  First,  the  deliberate  eivasions,  chiefly  in 
the  profes.sional  classes.  Secondly,  the  practice  of  those 
who  think  that  everybody  else  is  in  the  habit  of  under-declar- 
ing, and  that  they  are  only  doing  themselves  justice  if  they 
also  under-declare.  Thirdly,  where  it  is  a  question  of  igno- 
rance, and  where  no  books  are  kept,  as  in  the  case  mainly  of 
little  traders  and  lodging-house  keepers.  And  fourthly,  those 
who  evade  because  they  do  not  make  any  declaration  at  all.' 
With  reference  to  the  last  point,  one  of  the  Special  Commis- 
sioners said :  "  I  am  astonished  to  find  the  peculiar  code  of 
honor  which  is  to  be  found  all  over  the  country.  A  man 
who  would  cut  his  arm  off  before  he  woukl  deliberately  write 
a  false  state  iient,  will  wait  until  he  is  assessed,  in  the  hope 
that  the  assessment  will  be  wrong.  And  he  will  deliberately 
abstain  from  giving  information  which,  according  to  the  re- 
turn, he  is  bound  to  give,  and  yet  consider  that  he  is  not  doing 
anything  dishonourable  or  illegal."" 

Another  witness,  on  being  asked  what  objection  there  could 
be  to  requiring  every  man  to  keep  a  return,  statetl :  "There 
is  really  no  reason  why  they  should  object,  except  that  per- 
sons do  not  seem  to  deal  so  rationally  with  questions  of 
income  ta.x  as  with  other  subjects."  *  A  little  later,  and  subse- 
quent to  the  report  of  the  committee,  the  secretary  of  the 


'  r.z'iiitiue,  pp.  1 72-1 7 J. 

-  Tcstiiiiiiny  of  Commissioner  Dchenham,  Evidence,  p.  176. 

'  Walter  Cules,  I'.viJeme,  p.  nq. 

*  Evuience,  p.  S3. 


The  Modern  Income   Tax,  iM2~igii 


195 


Income  Tax  Reform  League,  Mr.  Hallet  Fry,  asserted  that 
the  chief  frauds  were  to  be  found  in  the  following  classes: 
"  foreigners  residing  in  England,  money-lenders,  journalists, 
theatrical  people,  recipients  of  large  professional  incomes, 
people  without  a  definite  residence,  like  bachelors,  specula- 
tors, and  recipients  of  large  incomes  living  in  very  modest 
houses."  *  In  the  evidence  before  the  committee,  however, 
every  one  agreed  that  the  frauds  which  had  been  chiefly 
growing  in  recent  years  were  to  be  found  in  the  case  of 
corporations  which  declared  themselves  foreign  companies, 
with  only  a  branch  office  in  London.  Mr.  Simpson  stated 
that  within  the  last  three  or  four  years  the  claims  for  abate- 
ments from  so-called  foreigners  had  increased  enormously, 
and  that  special  income-tax-repayment  agencies  had  even 
been  formed  for  this  purpose  alone.''  Sir  Thomas  Hewitt 
asserted,  "  I  know  that  the  evasion  under  the  provisions  of 
the  Act  extends,  and  is  daily  more  widely  extending,  to  Bel- 
gian iron,  to  silks  from  France  and  elsewhere,  to  wines  from 
Germany,  France,  and  Italy  ;  to  a  very  great  extent  to  velvets, 
mantles  and  other  goods  peculiar  to  foreign  trade  from  vari- 
ous foreign  countries,  and  secondly  to  trade  from  India  and 
the  Colonies."^ 

After  carefully  considering  all  these  points,  the  committee 
concluded  that  an  adequate  remedy  would  be  attained  by  the 
adoption  of  the  following  measures :  First,  that  every  person 
should  be  compelled  to  make  a  return,  whether  he  is  liable 
to  income  tax  or  not.  "  We  recognize,"  said  the  committee, 
"  that  no  steps  should  be  taken  that  can  possibly  be  avoided, 
which  would  tend  to  make  the  income  tax  more  unpopular, 
and  therefore  more  difficult  of  collection."  Hut  they  did  not 
think  that  this  compulsion  would  impose  any  hardship  on  the 
taxpayer.  They  recommended,  furthermore,  that  the  penalty 
for  failure  to  make  a  return  be  limited  to  five  pounds,  where 
the  individual  is  not  liable  to  i)ay  any  tax.     Where  the  indi- 


1  Hallet  I'Vy,  "The  Income  Tax  Prolilein,' 
ber,  1007,  p.  3?. 
-  EviJeute,  p.  103. 


n  M(ii;,nine  of  Com  mere f,  Scptem- 
Ap[-en  ii.x  no.  viii,  p.  jo. 


w^w^m.- 


196 


The  Imome   Tiix 


vidual  is  liablo,  hnwcvur,  .ind  makes  tin  return,  or  ar  incorrect 
return,  a  cluinyc  in  the  law  is  also  recommended.  Under  the 
existing  system  the  jienuity  was  twenty  pounds  and  treble  the 
duty,  and  the  law  allowed  only  one  year  in  which  to  rectify 
the  omission  by  a  surcharge.  These  provisions  the  committee 
thoughfentirely  inadequate,  and  recommended  not  alone  that 
the  surcharjje  or  .supplementary  assesiiment  mi^ht  be  made  at 
any  time  within  three  years  from  the  end  of  the  year  of  as- 
sessment, but  furthermore,  that  the  maximum  penalty  should 
be  treble  duty  for  the  entire  period.  Finally,  the  committee 
recommended  that  the  most  effectual  and  approjiriatc  penalty 
for  fraud  would  be  publicity,  and  that  the  government  should 
be  empowered  to  publish  names  and  details  in  case  of  gross 
fraud,  whenever  they  considered  it  advisable.  As  a  minor 
point,  the  committee  also  recommended  that  employers  who 
were  now  required  to  setul  in  lists  of  their  employees,  should 
henceforth  be  compelled  to  include  also  the  amounts  of  their 
salaries. 

§  6.    T/te  Sihct  Committee  of  1906 

Such  wa«  the  famous  report  of  the  departmental  committee. 
It  was  several  years  before  any  of  the  recommendations  were 
put  into  force.  In  the  meantime,  and  especially  after  the 
return  of  the  I.ilier..!  party  to  power  in  1906,  the  interest  in 
the  mure  fundamental  questiunsof  differentiation  and  gradua- 
tion of  the  MX  had  become  so  widespread  that  the  government 
of  Sir  Caiupbell-Bannerman  decided  to  appoint  a  parliamen- 
tary committee  to  consider  these  particular  questions. 

On  May  4,  1906,  a  Select  Committee  of  seventeen  mem- 
bers was  authorized  "  to  inquire  into  and  report  upon  the 
practicability  of  graduating  the  income  tax,  and  of  differen- 
tiating, for  the  purpose  of  the  tax,  between  permanent  and 
precarious  incomes."  The  committee  was  composed  of  Sir 
Charles  W.  Dilkc,  as  chairman,  and  of  prominent  members  like 
Mr.  Keir  Hardie,  Sir  Thomas  Whittaker,  Messrs.  McKenna, 
Redmond,  Trevelyan,  Cavendish,  and  others.  The  witnesses 
Were  coinparaiiveiy  few  la  nuuiber,  but  were  all  of  them  dis- 


H^l'^^SS^SJS^^EiSS 


Thi  Modirtt  Income   Tax,  iSdsigii  197 

tinKuishetl  mon,  indudinj,'  offui.ils  like  Sir  Ilcnry  Primrose, 
who  had  been  a  member  of  the  departmental  lommittee  of 
1904,  Sir  Thomaj  Hewitt,  and  Mr.  Gyles;  prominent  mer- 
chants and  bankers  like  Sir  Felix  Schuster;  economists  and 
statisticians  like  Messrs.  Kowlcy,  CoKhlan,  Chiozza  Money,  and 
Hcrnard  Mallet;  and  socialists  like  I'hilip  Snowden.  The 
committee  sat  during  the  remainder  of  the  session  of  1906, 
and  brought  in  their  report  on  November  29,  1906.' 

The  report  had  practically  been  a  foregone  conclusion  in 
view  of  the  existing  sentiment  in  parliumcnt  and  the  par- 
ticular complexion  of  the  committee.  The  officials  of  the 
inland  revenue  department,  especially  Sir  Henry  Primrose 
and  Mr.  Gyles,  were  indeed  oppo.sed  to  the  scheme  of  the 
committee,  but  the  evidence  of  the  other  witnesses  was  so 
overwhelming  that  the  comn.!  lound  no  difTiculty  in  arriv- 
ing at  its  conclusion.  A  d-aft  r  ,.ort  prepared  by  Sir  Charles 
Uilkc,  which  was  voluminous  and  interc.-.ting,='  was  not  ac- 
cepted, but  the  important  conclusions  were  virtually  the  same 
as  those  to  which  the  committee  as  a  whole  gave  its  adherence. 

Taking  up  first  the  question  of  graduation,*  the  committee 
pointed  out  that  the  tax  was  already  graduated  by  abate- 
ment in  the  case  of  incomes  of  not  over  £700.  They  pro- 
ceeded to  consider  whether  the  graduation  could  be  extended 
or  made  universal,  with  due  regard  to  economical  administra- 
tion. Graduation,  as  the  committee  pointed  out,  might  be 
effected  in  various  ways,  p'irst,  they  might  follow  what  we 
have  called  in  this  volume  the  "  lump-sum  "  scheme,  or,  as  the 
committee  put  it,  "  the  method  of  collecting  the  whole  of  the 
tax  directly  from  each  person,  upon  his  own  declaration." 
This,  however,  would  involve  an  abandonment  of  the  prin- 
ciple of  stoppage  at  source.  To  such  a  course  the  committee 
were  unaterably  opposed.  "The  importance  of  retaining  a 
principle  which  is  mainly  responsible  for  the  present  develop- 
ment of  the  tax  and  the  ease  with  which  it  is  collected,  and 

'  Report  from  Ih,-  Sclfct  Committee  on  Imome  f'ltx :  t,<gether  with  the  ProeeeJ- 
i'lp  ct  the  Committee.  .'Sfinutei  of  F.-:iJenre,  ,,,i/ an  Af't'er  'ix.      \ .■.\:'A::r- .  m-a-/.-. 
-  A'e/'ort,  pp.  xv-xxxvi.  »  Report,  nccs.  4-17. 


I 


f 


r.W'?'0?Pi®^S^t5P? 


198 


The  Income  Tax 


the  extreme  undesirability  of  doing  anything  which  would 
reduce  its  efficiency,  can  scarcely  be  over-estimated."  Ac- 
cordingly, the  committee  declared  their  conviction  that  "direct 
personal  assessment  for  the  whole  tax  is  not  practicable  in 
this  country  in  the  sense  of  being  an  expedient  or  desirable 
means  of  collecting  revenue.' 

A  second  metiiod  of  graduating  the  tax  would  be  that  of 
the  so-called  "super-tax"  ;  that  is,  a  second  tax  distinct  from, 
and  supplementary  to,  the  existing  tax,  to  be  levied  on  individ- 
uals by  direct  personal  assessment.  The  chief  suggestion  of 
this  nature  th?t  had  been  made  was  that  all  persons  with  in- 
comes over  ^5,000  should  be  requin"!  to  make  a  sepanvte 
return  showing  the  total  amount  of  the  income.  Graduation 
might  then  be  applied  to  this  part  of  the  tax.  The  committee 
conceded  that  this  new  portion  of  the  tax  would  be  directly 
personal  in  its  nature,  and  that  some  of  the  objections  just 
urged  would  apply  to  the  proposal.  They  considered,  how- 
ever, that  these  objections  "  arc  modified  to  the  extent  that 
the  tax  which  is  now  collected  at  the  source  would  continue 
to  be  so  collected,  consequently  there  would  be  no  loss  of 
revenue  there  as  the  result  of  failure  to  obtain  full  disclosure 
for  the  direct  personal  tax." 

The  committee  adverted  to  the  difficulty  of  discovering  in- 
dividuals who  have  an  inconie  T  £,  5000  a  year,  and  referred 
especially  to  the  objections  on  the  part  of  the  official  wit- 
nesses. They  contended,  however,  that  the  difficulties  had 
been  exaggerated,  althoua;h  they  conceded  that  time  would  be 
required  to  make  the  tax  work  smoothly.  They  indorsed  the 
recommendations  of  the  dopartinental  committee  of  1905  ;hat 
every  individual  be  required  to  make  a  return,  whether  he  is 
liable  or  not.  The  committee  therefore  concluded  that  "  the 
super-tax  upon  the  larger  incomes  is  practicable,  but  it  offers 
some  disadvantages  and  difficulties  which  have  been  pointed 
out." 

The  third  method  of  graduation  which  the  committee  dis- 
cussed was  that  of  graduatioii  by  degression,  which  might  take 
the  form  of  extendino'  the  cxistincr  svstem  of  abatements,  or 


The  Modern  Income   Tax,  1862-1911  199 

of  charging  a  lower  rate  of  tax  on  the  smaller  incomes.  The 
committee  assumed  that  whatever  changes  might  be  made  in 
the  rates,  it  was  not  desirable  to  diminish  the  total  yield  of 
the  tax.  Since,  therefore,  graduation  was  advocated  by  some, 
not  only  for  the  sake  of  securing  greater  equality  as  between 
individuals,  but  also  for  the  purpose  of  securing  additional 
revenue,  it  would  be  necessary  to  raise  the  rates  on  the  higher 
incomes  in  proportion  as  the  abatements  were  extended,  as 
well  as  to  enlarge  decidedly  the  costly  process  of  repay- 
ment. •  On  the  one  hand  the  very  much  higher  rates  on  the 
larger  incomes  "  would  arouse  a  feeling  of  resentment  against 
the  tax  which  it  is  very  desirable  to  avoid  "  ;  and  secondly, 
the  collection  of  immense  sums,  which  would  afterwards  have 
to  be  returned,  "  would  be  a  serious  inconvenience,  and  a 
genuine  ground  of  grievance  "  to  individuals,  and  *'  could  not 
fail  to  interfere  injuriously  with  the  ordinary  operations 
of  commerce.''  Out  of  •,  100,000  people,  with  an  income 
of  nearly  ^700,000,000,  abatements  were  already  allowed  on 
incomes  of  some  700,000  people,  with  a  total  income  of 
y^  2  50,000.000,  the  amount  collected  and  returned  being 
about  ^1,600,000.  While  this  gave  rise  to  no  particular 
difT-cultics,  th.;  committee  held  that  "  there  are  limits  beyond 
which  it  cannot  conveniently  and  usefully  be  extended." 
They  concluded  that  it  would  be  perfectly  feasible  to  increase 
the  abatements  to  ;^iooo,  or  even  more;  but  they  main- 
tained that  they  did  not  possess  sufficient  information  to 
fix  the  precise  figure  at  which  the  extension  of  the  present 
system  would  cease  to  be  prudent  and  convenient. 

Coming,  then,  to  the  question  of  differentiation  '  between 
permanent  and  precarious  incomes,  the  committee  stated  that 
they  had  found  it  desirable  to  define  clearly  the  meanin[5  of 
the  terms.  Other  terms  that  have  been  used  are  "  indu.strial 
and  spontaneous,  earned  and  unearned,  incomes  from  invest- 
ment and  personal  effort  "  A  great  many  more  terms,  which 
were  customary  half  a  century  ago,  might  have  been  men- 
tioned.^     The    committee    stated    that    probably    the    words 

'  A'e/iurl,  3CIS.  IS- 24.  -  (■/.  j«//i/,  [1.  I45. 


200 


The  Income  Tax 


I 


"  earned  "  and  "  unearned  "  most  accurately  represented  the 
distinctions  which  they  had  in  mind.  They  confessed  that 
they  were  unable  to  provide  a  completely  logical  and  satis- 
factory definition,  and  they  called  attention  tf3  some  of  the 
difficulties.  "  A  rough  working  distinction  which  would  prob- 
ably meet  with  general  acceptance,"  they  thought,  "would  be 
to  regard  the  profits  of  private  traders  as  earned  and  those 
of  public  companies  and  similar  undertakings  as  arising  from 
investment " ;  that  in  the  same  way  "  the  owner  of  land  who 
cultivates  it  himself  would  be  regarded  as  earning  his  in- 
come," but  that  "  the  owner  of  an  estate  who  let  it  to  others 
to  cultivate  wou!  1  not  be  regarded  as  <  ./ning  the  nel  income 
which  he  derived  from  the  lands  of  that  estate,  although  he 
might  act  as  his  own  steward  and  devote  much  time  to 
its  supervision."  Having  settled  that  point,  the  committee 
stated  that  "  the  existing  feeling  in  favor  of  some  differentia- 
tion in  the  amount  of  the  tax  levied  upon  earned  incomes 
does  not  require  that  all  incomes,  irrespective  of  size,  should 
receive  privileged  treatment";  for,  in  general,  "the  smaller 
the  business  and  the  smaller  the  profits  derived  from  it,  the 
larger  will  be  the  proportion  of  that  profit  which  has  in  the 
strictest  sense  of  the  term  been  'earned.'"  Those  and  other 
difficulties  and  objections  would  be  avoided,  in  the  opinion 
of  the  committee,  by  limiting  the  differentiation  between 
earned  and  unearned  incomes  to  incomes  not  exceeding,  say 
^3CXX>  a  year.  "Your  Committee,"  Vvj  are  told,  "are  of 
opinion  that  such  differentiation  is  practicable  and  can  most 
conveniently  be  carried  into  effect  by  charging  on  such  in- 
comes a  rate  of  tax  lower  than  the  normal  or  foundation 
rate." 

It  may  be  remarked  that  Sir  Charles  Dilke  had  referred 
with  approval  in  his  draft  report  to  the  German  system, 
which,  as  we  shall  learn,  attains  differentiation  through  a  sep- 
arate property  tax.  But  he  recognized  the  difficulty  of  intro- 
ducing a  new  property  tax  and  declared  his  preference  for 
the  scheme  which  was  ultimately  adopted  by  the  committee. 
Another  point  deserving  of  special  mention  is  the  opinion 


The  Modern  Income   Tax,  iS62-igii  201 

expressed  by  Sir  Felix  Schuster,  in  discussing  the  advisability 
of  asking  the  recipients  of  larger  incomes  to  make  a  declara- 
tion of  their  total  income.  Sir  Felix,  while  recognizing  the 
immense  advantages  of  the  Knglish  over  the  German  system, 
nevertheless  held  that  it  might  be  possible  to  exaggerate  the 
method  of  stoppage  at  source.  "  I  think  the  collection  of  a 
tax  at  the  source  might  be  carried  to  an  extreme,  and  I  do 
not  think  it  is  desirable  to  carry  it  to  an  extreme.  I  think 
the  effect  now  of  the  collection  at  the  source  on  the  minds 
of  many  people  is  that  the  revenue  gets  the  tax  wherever 
it  can,  and  that  there  is  no  more  duty  imposed  on  people 
to  make  correct  return.  I  would  not  like  to  strengthen 
that  feeling.     Personally  I  think  that  there  arc  limits."  ^ 

Finally,  the  committee  proceeded  to  consider  the  bearing 
of  death  duties  on  graduation  and  differentiation.  ^  They  re- 
ferred especially  to  the  calculations  submitted  by  Sir  Henry 
Primrose  and  Mr.  Mallet,  showing  that  if,  as  is  perfectly 
legitimate,  the  death  duties  be  regarded  as  partaking  to  some 
extent  of  the  nature  of  a  deferred  income  tax,  the  combined 
operation  of  the  two  taxes  does  in  practice  effect  a  very  con- 
siderable graduation  and  differentiation.  Despite  this  fact, 
the  committee  concluded  that  further  graduation  was  de- 
sirable. 

The  conclusions  are  summarized  as  follows  :  ^  — 

(i)  "  Graduation  of  the  income  tax  by  an  extension  of  the 
existing  system  of  abatements  is  practicable.  But  it  could 
not  be  applied  to  all  incomes  from  the  highest  to  the  lowest, 
with  satisfactory  results.  The  limits  of  prudent  extension 
would  be  reached  when  a  larger  increase  in  the  rate  of  tax  to  be 
collected  at  the  source  was  necessitated,  and  the  total  amount 
which  was  collected  in  excess  of  what  was  ultimately  retained, 
became  so  large  as  to  cause  serious  inconvenience  to  trade  and 
commerce,  and  to  individual  taxpayers.  Those  limits  would 
not  be  exceeded  by  raising  the  amount  of  income  on  which  an 
abatement  would  be  allowed  to  £,  1000  or  even  more. 


'  E;iJ,-iuc,  '\\n'A\-^r\  joij.  p.  174. 


M 


i 


202 


T/ie  Income  Tax 


(2)  Graduation  by  a  super-tax  is  practicable.  If  it  be 
desired  to  levy  a  much  higher  rate  of  tax  upon  large  incomes 
(say  of  ;C  5000  and  upwards)  than  has  heretofore  been  charged, 
a  super-tax  based  on  personal  declaration  would  be  a  practi- 
cable method. 

(3)  Abandonment  of  the  system  of  'collection  at  the 
source,'  and  adoption  of  the  principle  of  direct  personal 
assessment  of  the  whole  of  each  person's  income  would  be 
inexpedient. 

(4)  Differentiation  between  earned  and  unearned  income  is 
practicable,  especially  if  it  be  limited  to  earned  incomes  not 
exceeding  jC  3000  a  year,  and  effect  be  given  to  it  by  charg- 
ing a  lower  rate  of  tax  upon  them. 

(5)  A  compulsory  personal  declaration  from  each  indivi- 
dual of  total  net  income  in  respect  of  which  tax  is  payable  is 
expedient,  and  would  do  much  to  prevent  the  evasion  and 
avoidance  of  income  tax  which  at  present  prevail." 

Such  were  the  two  celebrated  reports  on  the  income  tax. 
It  was  not  long  before  most  of  the  proposals  of  the  two  com- 
mittees were  substantially  put  into  practice ;  but  with  char- 
acteristic English  conservatism  it  was  decided  to  take  only 
one  step  at  a  time.  Thus  it  was  that  some  of  the  reforms 
were  accomplished  in  the  year  1907,  and  some  more  in  the 
year  1910.  The  law  of  1907  dealt  primarily  with  the  subjects 
of  differentiation  and  fraud  and  with  certain  administrative 
features  ;  while  the  law  of  1910  took  up  the  topic  of  gradua- 
tion and  made  further  attempts  to  prevent  fraud. 

§  7.    T//e  Adoption  of  Differentiation  in  igoj 

In  his  budget  si)cech  of  April  18,  1907,  H.  H.  Asquith, 
the  Chancellor  of  the  Kxchcquor,  took  up  the  matter  of  dif- 
ferentiation. "The  income  tax,"  he  tells  us,  "as  it  is  one  of 
the  most  productive,  so  it  is  one  of  the  most  delicate  parts  of 
our  fiscal  machinery.  There  is  nothing  like  it  to  be  found 
anywhere  else  in  the  world."  '     Struting  with  the  important 

*  J  he  Pariiumentary  Debates,  1907,  vul.  172,  p.  1 198. 


The  Modern  Income  Tax,  1862-igii  203 

statement  that  "it  must  now  be  regarded  as  an  integral  and 
permanent  part  of  our  financial  system,"  he  discussed  the 
theory  of  the  question.  Comparing  two  individuals,  one 
"who  derives,  we  will  say,  ^1000  a  year  from  a  perfectly 
safe  investment  in  the  funds,  perhaps  accumulated  and  left 
to  him  by  his  father,"  and,  on  the  <>thcr  hand,  "a  man  mail- 
ing the  same  nominal  sum  by  personal  labour  in  the  pursuit 
of  some  arduous  and  perhaps  precarious  profession,  or  some 
form  of  business,"  he  maintained  that  "to  say  that  those  two 
people  are,  from  the  point  of  view  of  the  state,  to  be  taxed  in 
the  same  way  is,  to  my  mind,  flying  in  the  face  of  justice  and 
common  sense."  He  referred  to  the  unanimous  decision  of 
the  committee  as  to  the  necessity  of  making  a  difference  be- 
tween earned  and  unearned  incomes. 

"  What  is  an  earned  income  .'  "  asked  the  Chancellor.  "  It 
is  not  ea.sy  to  draw  a  distinction,"  he  answered,  "but  we  can 
but  do  our  best."  He  declared  that  »arned  incomes  included 
incomes  of  all  officers  and  employees  paid  by  salaries,  includ- 
ing clergymen  ;  of  every  class  of  professional  men  ;  and  of  all 
traders  whose  income  is  derived  substantially  from  their  own 
personal  labor.  He  conceded  that  to  distinguish  in  this  third 
class  between  incomes  which  are  either  wholly  earned  or 
partly  earned  and  partly  unearned,  "  neans  a  degree  of  logi- 
cal precision  where  there  will  be  the  greatest  possible  diffi- 
culty in  hindering  overlapping  in  dubious  cases  "  The  most 
practical  way  of  dealing  with  the  problem,  therefore,  he  held, 
was  to  confine  the  differential  treatment  to  earned  incomes 
which  do  not  exceed  ^^2000  —  not,  as  the  select  committee 
had  recommended,  X3000.  That  is  to  say,  the  lower  rate 
on  earned  incomes  was  to  be  limited  to  persons  whose  total 
income  from  all  st.urces  does  not  exceed  ^^2000.  The  Chan- 
cellor suggested  for  the  coming  year  the  full  rate  of  one  shil- 
ling in  the  pound  as  the  normal  tax  on  unearned  incomes, 
and  the  lower  rate  of  gd.  for  earned  incomes.  The  benefit 
of  the  lower  rate  was  to  be  granted  by  abatement,  and  the 
abatement  in  the  case  of  mixed  incomes  was  always  to  be 
made  from  the  earned,  and  nul  ivvm  the  unearned,  portion. 


m^ 


204 


The  Income   Tax 


Taking  up  next  the  question  of  graduation,  the  Chancellor 
declared  that  he  was  not  yet  ready  for  it.  "  Quite  apart  from 
other  reasons,  it  would  not  be  possible,  for  administrative 
reasons,  to  introduce  any  change  in  graduation  simultan'- 
ously  with  the  already  sufficiently  coini)licated  alterations  of 
a  differentiated  tax.  The  machinery  would  break  down 
under  the  strain  '  *  He  stated,  however,  that  he  d.J  not 
desire  to  announce  at  that  moment  any  final  opinion  on  the 
question  of  graduation. 

The  law  of  1907''  adopted  the  Chancellor's  proposals. 
The  rate  of  income  tax  in  general  fi<r  the  coming  year  was  put 
at  IS.,  but  it  was  provided  that  if  any  individual  claimed 
and  ])roved  that  his  total  income  from  all  sources  did  not 
exceed  .1^2000,  and  that  any  part  01  that  income  was  earned 
income,  he  should  be  entitled  to  such  relief  from  income  tax 
as  would  reduce  the  amount  payable  to  <^d.  A  statutory  defi- 
nition of  earned  income  was  given,'  and  the  usual  methods  fol- 
lowed in  the  proving  of  ill  claims  to  e.vemption,  relief,  or 
abatement  were  to  apply  to  this  new  form  of  relief.*  Two 
points  are  here  to  be  noted:  First,  that  earned  income  in- 
cludes partners'  salaries  and  interest  on  capital,  while  profits 
of  a  limited  or  sleeping  partner  are  deemed  to  be  unearned 
income.     Secondly,  as  soon  as  a  private  business  becomes  a 

'   VVif  PiiiHamentary  Dehiitc-s,  1 907,  vol.  172,  p.  1206. 

2  The  linance  Act,  1907,  7  Edw.  VII,  c.  13,  part  v,  sees.  18-28. 

^  Karneil  income  is  stated  to  !)c :  {n)  Any  income  arising  in  respect  of  any 
remuneration  from  any  olt'ice  or  eiii|'loymcnt  of  prol'.t  held  by  the  indiviiiual,  or  in 
respect  of  any  pension, superannuation,  or  other  allowance,  deferred  pay,  or  com- 
[lensation  f  1  l^ss  of  olfice  given  in  respect  of  the  past  services  of  the  individual, 
or  of  the  hushaml  or  parent  of  the  imlividual,  in  any  olTice  or  employment  of 
prolit,  whether  the  individual  or  hushancl  or  parent  of  the  individual  shall  have 
contriliuted  to  such  |iension.  superannuation,  allowance,  or  ileferre  1  pay  or  not ; 

(/')  .\ny  income  from  any  property  which  is  attached  to  or  forms  jir.rt  of  the 
emoluments  of  any  office  or  employment  of  profit  held  by  the  individual  ;   and 

(r)  Any  income  which  is  charged  under  .Schedules  li  or  D  in  the  Income  Tax 
Act,  1853,  or  the  rules  prescribed  l)y  Schedule  D  in  the  Income  Tax  Act,  1842, 
and  is  immediately  derived  l)y  the  inilividual  from  the  carrying  on  or  exercise  by 
him  of  his  pr  )fession,  trade,  or  vocation  either  as  an  individual,  or,  ii.  he  case 
of  a  partnership,  .is  a  partner,  personally  acting  therein.  — Sec.  19,  par.  7. 

*  Sec.  19,  pars,  i  and  6. 


The  Modern  Income   Tax,  1862-191 1  205 

corporation,  the  profits  change  from  earned  to  u.iearned  in- 
come. The  test  whether  a  given  income  is  earned  or  unearned 
may  be  described  us  follows :  If  it  is  derived  from  personal 
labor  or  from  pensions,  or  from  property  forming  part  of  the 
emoluments  of  office,  or  from  carrying  on  a  business  or  pro- 
fession, and  the  recipient  is  actively  engaged  therein  and  is 
not  protected  by  limited  liability,  then  such  income  is  earned, 
otherwise  it  is  unearned.^ 

The  law,  furthermore,  provided  for  the  carrying  out  of  some 
of  the  recommendations  of  the  dei>artmenta!  committee. 
In  the  first  place,  employers  are  henceforth  required  to  make 
a  return  not  only  of  the  names  and  places  of  residence  of 
their  employees,  but  also  of  the  salaries  paid  to  them.-  Thus 
was  adopted  a  scheme  which,  as  wc  shall  see  later,  had  long 
been  in  vogue  in  Italy.  In  the  second  place,  every  person  is 
required  to  make  a  return  of  his  income,  whether  or  not  he 
is  liable  to  income  tax,  the  penalty  for  failure  so  to  do  being 
fixed  at  ^5.  This  provision  al.si.  follows  some  of  the  conti- 
nental laws.  In  the  case  of  corporations,  etc.,  the  secretary 
is  to  make  such  returns.'  In  the  third  place  the  time  for 
making  a  surcharge  or  additional  assessment  is  extended  to 
three  years.*  Fourthly,  section  133  of  the  law  of  1842  and 
section  6  of  the  act  of  i8'')5, '.hich  deal  with  the  threc-vear 
average  system  in  Schjdule  D,  are  repealed,  and  it  is  pro 
vided  that  when  any  one  who  is  charged  upon  the  three-vear 
average  system  proves  that  his  actual  prorits  fall  short  of  the 
profits  as  computed  according  to  that  .s'.sten-i,  he  sha'.i  be 
entitled  to  be  charged  on  the  former,  instead  of  the  latter, 
basis.  If  any  bu.'^iness  is  discontinued  during  the  vear.  the 
taxpayer  shall  be  entitled  to  a  repayment  of  the  excct-s,  in 
case  he  can  prove  that  the  total  tax  paid  during  the  three 
previous  years  exceeds  the  total  amount  which  would  have 
been  paid  if  he  had  been  assessed  in  each  of  these  vcars  on 
the  actual  profits.-''      Finally,  --pecifjc  provisio:;  :s  n~.-irje  for 


'  E.  E.  Spicer  and  F,.  C.  Pcglir,  Im 
London,  irjio,  p.  I'). 

-  ScL.  21.  3  Sec.  22. 


'J'ji  m  Kticr, 


206 


The  Income  Tax 


i' 


such  allowance  as  the  commissioners  may  think  just  and 
reasonable  for  wear  and  tear  of  machinery  or  plant ;  and  if 
the  deductions  for  this  purpose  happen  to  be  greater  than  the 
profits  for  that  year,  they  may  be  carr;  d  on  to  subsequent 
years.  In  no  case,  however,  will  such  deductions  be  allowed 
if  they  exceed  the  actual  cost  of  the  machinery  or  plant,  in- 
cluding in  cost  any  capital  expenditure  by  way  of  renewal, 
improvement  or  reinstatement.' 

Thus,  finally,  was  introduced  in  1907  the  principle  which, 
almost  from  the  very  introduction  of  the  tax  at  the  close  of 
the  eighteenth  century,  had  been  demanded  by  numberless 
critics  and  reformers.  The  great  change  which,  a;:  we  re- 
member, had  been  so  persistently  and  successfully  opposed 
by  Gladstone,  was  now  definitively  accomplished.  Hut  it 
was  after  all  only  the  entering  wedge.  As  coni|Kired  with 
the  more  highly  developed  system  in  the  Italian  tax,  for  in- 
stance, the  distinction  between  earned  and  unearned  incon.es 
must  be  considered  simply  as  a  first  and  halting  step  in  the 
process  of  differentiation. 

Some  of  the  opponents  of  the  change  had  based  their 
opposition  on  the  old  idea  of  Gladstone  that  it  would  obvi- 
ously interfere  with  the  revenue.  These  fears,  however, 
proved  to  be  unfounded.  The  fiscal  results,  in  part,  were  un- 
expectedly favorable.  Asquith  had  estimated  in  his  budget 
speech  that  the  loss  due  to  the  introduction  of  the  principle 
cf  differentiation  would  be  about  two  million  jiounds  —  one 
and  one-fourth  millions  due  to  the  effect  of  differentiation 
itself,  and  three-fourths  of  a  million  due  to  delays  in  collec- 
tion, in  consequence  of  the  change  in  the  law.  It  turned 
out,  however,  that  there  was  virtually  no  loss  at  all.  In  the 
budget  statement  of  May  7,  1908,  which  was  delivered  by 
Asquith  (who  had  in  the  meantime  become  Prime  Minister), 
in  lieu  of  the  new  Chancellor  of  the  Exchcauer,  H.  Lloyd 

'  Sec.  25.  This  ]irovision  was  inscrtnl  to  overrule  a  court  decision  to  the 
cunt'-ary,  in  a  case  th.At  was  won  by  a  lawyer,  who  now,  as  (  hancellor  of  the 
Exchequer,  was  instrumental  in  undoini;  his  own  work.  See  .'■^piccr  and  Peeler, 
Income  Tax  in  Relation  to  .■hiounts.     2d  ed.,  London,  1910,   p.  72. 


H 


The  Modern  Income   Tax,  1862-igii  207 

GeorRc,  he  stated  that  "the  cause  of  this  remarkable  in- 
crease  in  the  revenue  is  to  be  found  in  the  differentiation 
clause  itself.  The  mere  offer  cf  the  lower  rate  of  tux  has 
sufTued  to  increase  the  amount  of  income  submitted.  Thus 
I  may  say  that  differentiation  has  worked  not  only  a  fina/itjal, 
but  a  moral  reform."  1  Asquiih  went  on  to  give  his  judg- 
ment of  the  matter  in  a  passage  which  deserves  to  be  quoted 
in  full:  "I  hope  I  may  say  without  undue  self-complacency, 
that  differentiation,  always  deemed  to  be  just  and  fair,  was 
for  sixty  years  strongly  denied  by  almost  every  great  author- 
ity to  be  workable  in  practice.  Differenljation  has  bee.-) 
proved  by  experience  to  be  not  only  practicable,  but  smooth 
and  easy  in  its  operation  ;  and  it  has  in  fact  paid  for  itse.f, 
and  it  has  removed,  once  and  for  all,  the  most  obvious  and 
crying  grievances  and  inequalities,  —  I  do  noi  sav  all  of  the.n, 
by  any  means,  —but  the  most  cryin:,'  grievances  and  inequal- 
ities which  have  marred  the  equity  and  clogged  the  eflficiencv 
of  the  income  tax  as  a  permanent  instrument  of  revenue." 


§  8.     TIic  Adoplii  It  if  Graduati'.'U  m  j],io 

Now  that  the  principle  of   differentiation   had   bee 
nitely  adopted,  the  government  was  readv  \.>  proceed 

consideration  of  the  other  ^rreat  r ->■-,;« •'•^v.r  u^  t, 

sion.  It  is  doubtful  how  s..on  this  wuu'.d  have  be' 
practical  matter,  however,  were  it  :.':  for  the  exieren 
the  treasury  and  the  need  _:  se.u.-;:.^'  additiona!  r> 
for  the  purpose  of  nnar.i:..;,'  the  rreat  s'-he-ne  of 
reform  known  as  the  C>:d  Age  Pc:.;-;  nt.  Tne  .'  •. 
that  the  adoption  of  the  s.her-.e  (f  r.rcv'ress' " 
tion  as  applied  to  the  income  \c\  w-_  ..Id  t'':^^  a'-.o: 
two  results;  first,  it  wuuid  vj^^d  cons-iderab;\  inc 
revenue,  and  second,  it  would  .".:-.ke  tne  wea;:.':je'  • 
feel  that  they  were  directlv  intere'-t':d  :r.  :.':t  :. '.■^"aT 
social  reform,  the  bencf.ti    of   wh-'-    w"-   ••■  a- •  \- 

"  ■"      "-        r  r  -. 

less  foitunate  members  ol  the  corr.rr.o'.itv 


n  Gefi- 
to  tne 
'ogres- 
orne  a 
.'ies  of 
r\e:.  v.e 
so'.ia. 
-.  waj 
ta^.a- 

"■cased 
.a'-seb 

:o  tne 


'   J  '.!  /',ir:i  iv:;n: 


-'.     !«.», 


2o8 


The  Income  Tax 


On  April  29,  1909,  Lloyd  Cicorgc  introduced  his  now  his- 
toric budget.  After  reviewing  the  history  of  the  income  tax, 
he  pointed  out  that  it  was  feasible  to  keep  the  tax  at  the 
permanent  figure  of  five  per  cent,  and  at  the  same  time  ren- 
der it  possible  to  rely  upon  the  tax  for  additional  l.irge  sums 
in  case  of  emergency.  "  A  careful  consideration  of  these 
figures  ought  to  convince  the  most  sceptical  that  the  maxi- 
mum rate  of  the  tax  may  be  retained  at  \s.,  or  even  increased, 
without  seriously  encroaching  upon  our  available  reserves  for 
national  emergencies."  '  Lloyd  George  called  attention  to  the 
fact  that  "  the  income  tax,  imposed  originally  as  a  temporary 
expedient,  is  now  in  reality  the  centre  and  sheet  anchor  of 
our  financial  system,"  and  he  proceeded  to  discuss  the  ques- 
tion of  securing  additional  revenue  from  it.  The  time,  he 
thought,  had  gone  by  "  when  a  simple  addition  of  pence  to 
the  poundage  of  the  tax,  attractive  as  the  simplicity  of  that 
expedient  is,  can  be  regarded  as  a  satisfactory  solution  of  a 
financial  difficulty."  He  pointed  out  that  "  the  principles  of 
graduation  and  differentiation,  the  apportionment  of  the  bur- 
den as  between  different  classes  of  taxpayers,  according,  on 
the  one  Land,  to  the  extent,  and,  on  the  other  hand,  to  the 
nature  of  their  resources,  are  in  the  lower  stages  of  the  eco- 
nomic tax  scale  already  recognized  by  abatements  and  allow- 
ances." He  added  that  "it  remains  to  comi)lete  the  system 
by  extending  the  application  of  these  principles,  and  in  regard 
to  difTcrentiation  by  taking  account  to  some  extent,  at  any 
rate,  not  only  of  the  source  from  which  income  is  derived,  but 
also  of  the  liabilities  which  the  taxpayer  has  contracted  in  the 
discharge  of  his  duties  as  a  citizen,  and  of  the  other  burdens 
of  taxation  borne  by  him  by  virtue  of  those  responsibilities."* 
Notwithstanding  the  changes  effected  by  the  law  of  1907, 
Lloyd  George  held  that  the  burden  of  the  tax  upon  earnings 
was  still  disproportionately  heavy.  He  therefore  proposed 
that  while  the  general  rate  of  the  tax  should  be  raised  to 
\s.  2d.,  the  rate  upon  earned  incomes  in  the  case  of  persons 
whose  total  income  did  not  exceed  /,"  3000  should  remain  as  it 

•   The  I'lirliamenlary  Debatts,  Session  1909,  vcl.  iv,  ji.  506.  -'  Ibid.,  p.  507. 


tT^Jfwt^m 


The  Modern  Income   Tax,  i.S6j  kjh  209 

then  stood,  namely  at  (>/.  up  to  /,  2(xx)  and  at  ii.  between 
X^ooo  and  ^"3000.  He  also  suKRested  tlial  in  c  asi:  ul  in- 
comes not  exceeding  X  500  there  be  an  abatement  of  /,  lu 
for  every  child  under  the  aj^e  of  sixteen. 

Proceeding  to  the  question  ol  progression,  the  Chancellor 
took  a  conservative  position.  "The  introiluction  of  a  com- 
plete scheme  of  graduation.  ai)plicabk-  to  all  incomes,  besidijs 
raising  cjuestions  of  general  i>rinciple,  whiili  it  is  tuit  neces- 
sary now  to  discuss,  would  reejuirc  an  entire  rcLonstruction  of 
the  administrative  machinery  of  the  ta.\,  including  in  all  j;rob- 
ability  the  abandonment  to  a  very  large  e.vtenl  of  the  princi- 
ple of  collection  at  the  source,  uj)(jn  which  the  j)r(K]uctivity 
of  the  tax  so  largely  depenus,"  '  He  therefore  stated  th:tt  he 
would  accept  in  principle  the  schen)e  suggested  bv  tiie  Com- 
mittee of  I9CT6,  namely,  the  idea  of  a  super-ta.\.  .After  con- 
sidering various  methods  of  acc(jmp!ishing  this  result,  he 
proposed  to  limit  this  additional  tax  to  incomes  exceeding 
jtSOOO,  and  to  levy  a  super-tax  at  the  rate  of  6t/.  upon  the 
amount  by  which  such  incomes  exceed  /3000.  He  pointed 
out  that  the  machinery  of  the  tax  would  in  the  r:;ain  be  inde- 
pendent of  that  of  the  existing  income  tax,  but  tliat  the  asscss- 
mi.  s  would  be  made  by  Special  Commissioners  appointed 
under  the  general  code.  In  the  case  <d  real  propertv  in 
Schedule  A  he  also  proposed  that  a  s;<ecir<l  five  ycr  cent 
allowance  be  made  for  cost  of  nianagenient,  '..)  addition  Xh  the 
existing  allowance  of  one-sixth  aisd  one-eighth  for  repairs. 
The  Chancellor  estimated  that  the  super-tax  ['roper,  when  in 
full  working  order,  would  yield  an  adclit:  nal  Ji2.yjijSjiy.\ 

The  proposals  of  the  governrr:e:,t  with  refere.'ice  to  the 
income  tax  met  with  remarkably  .itt'.e  i.';'j>o-;tiorj.  largci} 
perhaps  for  the  reason  that  the  main  f:,'nt  was  .  rjccr.t.'-ated 
upon  some  of  the  other  features  of  the  budget,  n-:ore  cspeciaily 
the    land-tax    provisions.^      The    super-rax    propositioij    was 


'    Tke  ParltiKHin'  ir:  fif  ;.'■;.  ^■ 
-  For  a  genersl  statt-inent  cf  tht 
sec  the   artitlfr  bv  t!,.-  ;  ri-»<rnt  wr;'v 
in  The  Sut:f\,  \j1   wiii     i^ii.   .  ;  : 


I  •■riQ.  V 


■•  '-^  •  T      V-'':  ■ 

L'  '■'.    tr,r   r."«    hi«!''r..    iju'U'' 


'"y- 


3IO 


The  Income  Tax 


<:. 


indeed  opposed  by  some  speakers ;  but  even  Halfour,  the 
leader  of  the  opposition,  confcased  that  he  had  "  never  been 
able  to  talte  that  clear  abstract  view  of  John  Mill,"  and  said 
that  he  was  not  pre[)ared  to  deny  "  that  some  graduation  is  fair, 
convenient  and  expedient."  Balfour  coi\lcnted  himself  with 
remarking  that  if  the  effect  of  the  death  duties  be  considered, 
it  would  be  found  that  they,  in  connection  with  the  proposed 
sui)er-tax,  led  to  a  perilously  high  degree  of  progression. 
"  I  think  the  Chancellor  of  the  Kxchequcr  will  find  that 
the  rise  is  almost  dangerously  steep."  '  The  overwhelming 
majority,  however,  expressed  an  approval  of  the  views  of  the 
Chancellor  of  the  Kxchequcr. 

In  a  later  speech  Lloyd  George  definitively  extinguished 
the  lingering  idea  that  even  the  super-tax  might  be  considered 
simply  as  a  reserve  for  special  exigencies.  "  Why  should 
the  tax  be  treated  as  a  reserve,"  he  asked,  "as  something 
which  is  of  a  temporary  character,  while  other  taxes  are 
regarded  as  permanent  .■'  Why  should  not  the  other  taxes 
have  their  turn  as  temporary  taxes,  the  taxes  on  the  food 
of  people,  for  instance  .'  Why  should  ta.xes  on  the  necessaries 
of  life  be  regarded  ps  permanent  and  the  taxes  on  hifjh 
incomes  as  purely  temporary  ?  If  any  taxes  are  to  be  treated 
as  a  reserve,  I  should  say  that  the  taxes  which  ought  to  be  so 
treated  are  those  which  would  press  heaviest  on  the  people 
who  can  least  afford  theni."^  And  somewhat  further  on 
he  discussed  the  administrative  features  of  the  proposed 
super-tax.  "In  this  country,"  he  said,  "you  have  got  ta.xa- 
tion  at  the  source.  In  Germany  the  whole  of  the  income- 
is  submitted;  there  is  a  system  of  investig  on  which 
probably  we  would  not  stand  in  this  country  ;  it  is  a  very 
severe  one.  We  do  not  propose  anything  of  the  kind  here. 
We  have  done  everything  in  our  power  to  make  the  conditions 
as  little  oppressive  as  possible  to  those  whom  we  are  obliged 
to  submit  to  this  process.     I  do  not  see   that    there  is  any 

'  Speech    of    May    3,     1909  ;     The    Parliumeiltary   DebaUi,    Twenty-eighth 
I'arliament,  4th  session,  pp.  755-757. 
-  Speech  of  May  1  j,  ibia.,  p.  1959. 


Hi 


The  Modern  Income   Tax,  iS6j-igii 


311 


real  protest  against  it. 


I  think  t'lc  general  feeling  among 


the  rich  people  is  that  they  can  atfi.nl  to  t;ive  more  and  they 
are  prepared  to  give  more ;  I  honestly  do  not  think  that 
this  proposed  income  tax  has  created  protests.  .  .  .  Certainly 
there  is  no  real  resentment  against  this  proposal.  We  have 
not  made  it  oppressive.  We  have  made  it  perfectly  fair. 
The  graduations  are  cpiite  gentle."  ' 

The  budget  of  190<;.  after  first  being  thrown  out  by  the 
Lords,  was,  as  is  well  known,  adopted  in  1910.^  The  income 
tax  for  the  year  1909  10  was  levied  at  the  rate  of  li-.  2t/., 
but  it  was  provided  that  whenever  the  total  income  of  any 
individual  exceeds  /.'sooo,  there  shall  be  "an  additional  duty 
of  income  tax  (in  this  act  referred  to  as  a  super-tax)  at  the 
rate  of  sixpence  for  every  pound  on  the  amount  by  which  the 
total  income  exceeds  three  thousand  pounds."''  The  super- 
tax was  to  be  assessed  by  the  Special  Commissioners.  The 
law  states  it  to  be  the  "duty  of  every  person  chargeable  with  a 
super-tax  to  give  notice  that  he  is  chargeable  ";  but  provision 
is  also  made  for  the  serving  of  notice  upon  such  persons  by 
the  Special  Commissioners.  If  any  one  without  reasonable 
excuse  fails  to  make  return  or  to  give  the  notice,  he  shall  be 
liable  to  a  pennlty  of  fifty  pounds  f;ir  every  day  during  which 
the  failure  continues,  and  if  he  tails  to  make  any  return,  the 
Special  Commissioners  may  make  an  assessment  of  the  super- 
tax according  to  the  best  of  their  judgment.  The  rest  of  the 
procedure  is  similar  to  that  in  force  for  the  ordinary  income 
tax,  although  it  is  again  specifically  provided  that  the  Ad- 
ditional Commissioners  may  amend  any  assessment,  or  make 
a  new  or  an  additional  assessment  during  any  time  within 
three  years  of  the  expiration  of  the  original  year  of  assess- 
ment.* 

With  reference  to  the  differentiation,  it  was  now  provided 


'Speech  uf  Mav  12,  ifKX);  /'/if  J'atiiiiumtlary  Dehatti,  Twenty-eighth 
Parliament,  4th  session,  p.  19OJ. 

-  The  finance  {igo<f-igro)  .tcl,  /<;/<),  April  29.  U)>o,  10  ICdw.  VII,  c.8.  The 
income  tax  provisions  are  found  in  part  IV,  sees.  65-72. 

•  Sec.  eo.  *  sec.  72. 


;i4''i""'KrV>:^ 


H2 


The  Income  Tax 


that  on  all  earned  Incomes,  when  the  total  income  exceeds 
jt  2000  and  docs  not  exceed  X  30CX3,  the  tax  should  be  \s. 
instead  of  \s.  2d.  Another  new  feature  in  the  law  w^s  the 
granting  of  relief  in  the  case  of  children.  VV  iiere  the  total 
income  is  not  over  ^^  500,  a  relief  from  income  tax  equal  to  the 
amount  of  the  tax  upon  £,  10  is  permitted  for  each 
child  under  the  age  of  sixteen.'  An  important  change  was 
also  made  in  Schedule  A.  It  was  now  provided  that  if  the 
owner  of  any  land  including  farm-houses  and  buildings  or  any 
house,  the  annual  value  of  which  does  not  exceed  X  8,  shows 
that  the  cost  of  mainterance,  repairs,  insurance,  and  manage- 
ment, on  the  average  of  the  preceding  five  years,  has  exceeded 
in  the  case  of  land  one-eighth  part  of  the  annual  value,  and  in 
the  case  of  houses  one-sixth  part  of  that  value,  he  shall  be 
entitled  to  a  repayment  of  the  tax  on  the  excess,  not  exceeding 
in  the  case  of  land  one-eighth  jiart,  and  in  the  case  of  houses, 
one-twelfth  part  of  the  tax  on  the  annual  value.'-^  This  brings 
the  maximum  total  allowance  for  repairs  and  maintenance  up 
to  tweaty-five  per  cent  of  the  annual  value  of  the  property  in 
both  cases.''  If  a  person  occupies  his  own  house,  the  net 
annual  value  is  still  considered  as  income.  Furthermore,  the 
exemption  accorded  co  friendly  societies  and  trades  unions  is 
enlarged  so  as  to  apply  in  all  cases  where  the  amount  docs 
not  exceed  £,  300  gross  insurance,  or  £,  52  by  way  of  annuity.* 
Finally,  the  law  contains  an  important  provision,  withdrawing 
the  right  of  exemption  and  abatement  or  relief  from  any  per- 
son who  is  not  resident  in  the  United  Kingdom,  with  the 
exception  of  officials  ot  the  government,  missionaries,  and 
individuals  who  remain  abroad  because  of  their  health.  It 
provides,  however,  that  the  tax  on  interest  or  dividends 
of  any  securities  of  a  foreign  state  or  a  British  possession 
which  are  payable  in  Great    3ritain   shall   not  be  assessed 


'  Sec.  68.  2  Sec.  69. 

"In  the  case  of  farm  property  the  old  allowance  of  one-eighth  plus  the  new 
allow.mct  of  one-eighth  eipials  one-quarter  oi  twenty-live  per  ciiit  ;  in  the  case 
of  h  luses  the  nM  allowance  of  one-sixth  plus  the  new  allow.mce  of  one-twelfth 
equals  one-quarter  or  twenty-live  per  cent.  *  Sec.  70. 


Cih.    m 


The  Modern  Income  Tax,  1802-1911 


213 


^ 


wher  the  owner  of  the  securities  does  not  reside  in  Great 
Britain. 

Thus  was  accomplish^'  hj  sccnd  great  reform  of  the 
income  tax.  Henceforth  isut  op.ly  .liUcn  iitiation,  but  gradu- 
ation, is  to  be  an  avow  1  ruur,-  of  'ne  English  system. 
Moreover,  virtually  all  t..-  i^i , ,01 'int  ;,i'.sgostioi.£  offered  by 
the  departmental  committee  for  the  reduction  of  fraud  have 
now  been  enacted  into  law.  It  is  worthy  of  especial  note  that 
a  system  of  allowances  for  children,  which,  as  we  remember, 
was  a  part  of  the  original  income  tax  of  1799,  and  which 
worked  so  badly  that  it  was  soon  abolished,  has  now  again 
been  introduced.  It  is  a  striking  testimony  not  only  to  the 
recognition  of  the  more  modern  ideas  as  to  the  social  functions 
of  an  income  ta.x,  but  also  to  the  increased  confidence  that  is 
feh  by  the  British  government  in  the  administrative  features  of 
the  tax.  What  was  utterl'-  impossible  a  -entury  ago  has  now 
become  entirely  feasible. 

§  9.    Conclusion 

The  E'.glish  income  tax  has  lasted  in  its  present  shape  for 
well-nigh  three-quarters  of  a  century.  The  most  striking 
fact  in  its  history  is  the  great  change  that  has  taken  place  in 
public  sentiment.  Slowly  and  very  gradually  the  original 
and  inveterate  repugnance  to  the  tax  has  been  overcome,  and 
has  given  way  to  a  recognition  01  its  inevitableness  and  to  an 
appreciation  of  the  great  function  that  it  has  to  perform  in 
English  fiscal  and  social  life.  This  change  in  sentiment  is 
due  in  part  to  the  evolution  that  has  occurred  in  England,  as 
elsewhere  in  Europe,  in  the  general  attitude  with  regard  to 
the  social  functions  of  taxation.  But  it  is  also  in  perhaps 
even  greater  degree  due  to  the  improvements  that  have  been 
made  in  the  underlying  principle,  as  well  as  in  the  adminis- 
tra'H'c  machinerv,  of  the  tax;  so  that  what  was  originally 
consia^red  insupportable  has  now  come  to  be  regarded  as 
not  only  endurable  but  proper. 

That  the  income  tax  is  administrativelv  ideal  is  indeed  f"ar 


214 


The  Income  Tax 


■!f 

It 


% 


j 


^ 


from  the  truth.     We  still  find  occasional  complaints.     Fry,  for 
instance,  has  called  attention  to  several  matters,  some  of  which 
subsequently  formed  the  subject  of  consideration  by  the  depart- 
mental committee.!     Stamp  maintains  that  the  system,  with  its 
wholesale  survivals  of  the  verbiage  of  the  eighteenth  century 
acts,  its  maze  of  averages  and  bases  of  calculation,  its  quaint 
references  to  alum  and  mundic,  forms  one  of  the  most  difficult 
branches  of  the  law,  constituting  a  sealed  book  to  all  but 
experts,  and  an  e.xasperation  to  the  lay  mind.^     Another  writer 
characterizes  it  as  the  "  most  dishonourable  and  humiliating  tax 
that  has  ever  been  put  upon  a  willing  and  generous  nation."  a 
A  recent  anonymous  writer  speaks  of  "  methods  about  which 
there  is  infrequently  anything  that  is  creditable  and  often 
much  that  is  tyrannical,"  and  thinks  that  "the  ingenuity  of 
the  collectors  in  gaining  advantage  over  the  taxpayers  is  really 
most  wonderful.     Their  guile  is  superb."*     No  tax.  however, 
is  really  popular,  and  as  against  these  magazine  writers  we 
may  on  the  whole  take  a^   more  typical  the  judgment  of 
Armitage-Smith,  the  author  of  a  recent  British  treatise,  "  that 
the  method  of  collection   is  simple  an<l  economic,  that  the 
tax  is  highly  productive,  and  that  it  satisfies  fairly  all  the 
canons  of  Adam  Smith.     It  has  now  becon>e  an  established 
element  in  the   British  tax  system,  and  democratic  tendencies 
strengthen  its  position."  ^ 

If  we  attempt  to  summarize  the  features  of  the  English 
income  tax  which  are  responsible  for  its  undoubted  success, 
we  might  state  them  as  follows:  — 

First,  the  happy  blending  of  regard  for  local  interests  and  for 

n._  Hallett  Fry.  Income  Tnx  Ano,„aln-s.  I.„ndun.  uyoy,  an.l  the  same 
authors  I ht  Income  'I'ax  Bur.ieii.     I.ondun,  1904. 

-J.  C  Stamp.  "  Kcunomic  .\spe,  ts  of  Income  Tax  Change,"  in  The  Economic 
hezteu;  vol.  \ix  (1909),  p.  420. 

=  "The  Tyranny  of  the  Income  Tax,"  fihchvooJ's  Magazine,  vol.  178  (iqos) 
pp.  279-284.  /     V   -^j/. 

♦"Anomalies  of  Income  Tax  Collection,"   in   Chamhrs's  /ournal,  ,907.  pp 

'•'  rrincipu,  anU  Methods  of  Taxatum.  HvG.  Armitage-Smith.  L.mdon.  1906. 
pp.  64.  65.  .    7"  . 


The  Modemi  Income  Tax,  1862-igii  215 


i 
I 


fiscal  productiveness.  The  original  assessment  of  the  tax,  it 
will  be  remembered,  is  placed  in  the  hands  of  appointees  of 
the  Land  Tax  Commissioners,  and  these  Land  Tax  Commis- 
sioners are  non-salaried  representatives  of  the  local  gentry. 
It  was  rather  by  accident  that  England  stumbled  into  this 
method  at  the  very  outset  of  the  income  tax,  at  the  close  of 
the  eighteenth  century;'  but  with  the  characteristic  British 
fondness  for  old  customs,  it  has  survived  to  the  present  day. 
The  taxpayers  feel  that  their  interests  arc  in  a  sense  looked 
after  by  their  own  representatives,  and  yet  the  interests  of 
the  revenue  are  guarded  by  careful  supervision  on  the  part 
of  representatives  of  the  central  government.  On  the  one 
hand  the  danger  of  too  much  bureaucracy  is  eliminated;  on 
the  other  hand  the  risk  of  inadequate  yield  is  averted. 

Second,  the  ingenious  system  of  the  utilization  of  experts 
through  the  medium  of  the  Additional  Commissioners.  The 
weak  point  in  every  income  tax  is  in  the  assessment  of  busi- 
ness incomes.  If  this  be  left  to  ordinary  administrative 
underlings,  there  is  great  danger  cither  of  ineffectiveness  or 
of  inquisition.  Great  Britain  has  been  able  to  avoid  both  of 
these  perils  in  large  measure,  by  the  system  of  Additional 
Commissioners,  who.  as  we  know,  are  frequently  drawn  from 
the  ranks  of  the  most  prominent  business  men  in  the  com.- 
munity,  and  who  consider  the  service  both  a  duty  and  a  privi- 
lege. The  public  spirit  which  animates  this  part  of  the 
administration,  and  which  attracts  to  the  service  the  aid  of 
what  may  be  called  out.sidc  experts,  cannot  be  too  highly 
commended.  It  is  in  no  small  degree  responsible  for  the 
comparatively  smooth  working  of  the  law. 

Third,  the  absence  of  inquisitorial  procedure.  One  of  the 
most  difficult  things  in  fiscal  matters  is  to  avoid  on  the  one 
hand  the  Charybdis  of  lax  administrative  methods,  which  must 
everywhere  result  in  a  travesty  of  the  law,  and  on  the  other 
hand  the  Scylla  of  drastic  methods,  the  very  rigidity  of  which 
is  apt  to  defeat  itself.  A  long  experience  has  enabled  /ne 
English  administrators  to  steer  their  course  skilfully  between 


2l6 


The  Income   Tax 


% 


(V^ 


these  two  perils.  The  early  complaints  against  the  inquisi- 
toiial  character  of  the  tax  have  long  since  well-nigh  completely 
disappeared ;  and  yet  the  effectiveness  of  the  administration 
and  its  success  in  minimizing  fraud  have,  as  we  know,  grown 
more  and  more  pronounced  from  decade  to  decade. 

Fourth,  the  system  of  stoppage  at  .source.  This  is  per- 
haps the  chief  cause  of  the  groat  success  of  the  ICnglish  in- 
come tax.  The  original  lump-sum  income  tax  was,  as  we 
know,  abandoned  as  unworkable,  and  it  has  been  the  u.  iversal 
testimony  of  all  English  officials  that  any  attempt  to  return 
to  this  early  and  discredited  system  would  be  fraught  with 
disaster.  If  there  is  any  one  point  to  which  the  British  au- 
thorities tenaciously  cling,  it  is  this  system  of  dividing  the  tax 
into  schedules,  and  of  seeking,  as  far  as  possible,  to  secure 
the  revenue  by  steppage  at  source. 

Fifth,  the  .studied  moderation  of  the  rate.  England  has 
always  sedulously  refrained  from  incurring  the  risk  which,  as 
we  shall  see,  has  actually  befallen  some  other  states,  of  so 
straining  the  possibilities  of  the  system  as  to  imperil  the  rev- 
enues. For  several  decades,  while  the  permanence  of  the 
tax  was  not  yet  assured,  it  is  perhaps  easily  explicable  that 
the  rate  should  have  hovered  around  three  to  four  per  cent. 
But  even  in  recent  decades,  where  the  tax  has  become  an 
acknowledged  permanent  part  of  the  system,  the  normal 
rate  has  been  kept  down  to  five  or  six  per  cent.  To  take 
away  six  per  cent  of  a  man's  income  by  what  has  become 
almost  the  sole  example  of  general  direct  taxation  cannot 
be  considered  in  any  way  excessive.  It  is  this  moderation 
of  the  rate  that  has  contributed  not  a  little  to  the  success  of 
the  tax. 

Sixth,  the  introduction  of  differentiation.  We  have  seen 
that  almost  from  the  inception  of  the  tax  the  policy  of 
assessing  all  the  different  kinds  of  income  at  the  same  rate 
gave  rise  to  strenuous  objection.s.  For  many  weary  decades 
the  eloquence  of  Gladstone,  in  opposition  to  what  have  since 
turned  out  to  be  the  imaginary  dangers  of  a  change,  was  snf- 
hcient  to  prevent  all  serious  attempts  at  reform.     But  with  the 


The  Moih-r>i  Income   Tax,  1862-ign 


217 


weakening  of  tlie  individualistic  tendencies  for  which  Glad- 
stone stood,  and  with  the  coming  to  the  front  of  a  new  gen- 
eration of  statesmen,  the  seemingly  impossible  has  been 
accomplished,  and  what  has  always  been  the  greatest  single 
objection  to  the  English  income  tax  has  now  been  removed. 

Seventh,  the  adoption  of  the  system  of  progressioi  llere 
again  a  noticeable  ciiange  has  taken  place  in  the  public 
mind.  At  the  beginning  of  the  eighteenth  century  any  sys- 
tem of  graduation  was  looked  upon  by  reputable  thinkers 
and  by  prominent  statesmen  as  a  species  of  confiscation.  All 
through  the  middle  of  the  nineteenth  century  the  projiosition 
to  introduce  progressive  taxation  seemed  to  smack  of  social- 
ism. Hut  here  again  a  new  generation  has  brought  with  it 
new  ideas,  and  what  was  long  since  taught  by  the  scientists 
of  the  Continent  was  reenforced  by  the  conclusions  drawn 
from  actual  life,  until  the  way  was  prepared  for  the  definite 
acceptance  by  the  statesmen  of  a  princii)le  that  had  come  to 
ai)prove  itself  to  the  ]nil)lic  mind.  Yet  the  es.sential  c(m.serv- 
atism  of  the  English  people  made  them  shrink  from  adopting 
the  principle  in  all  its  baldness.  With  that  wisdom  so  char- 
acteristic of  all  political  and  economic  advance  in  Great 
Britain,  the  new  was  built  on  the  old,  and  the  ingenious 
scheme  of  a  super-tax,  which  retained  all  the  advantages  of 
the  original  svstem  of  stoppage  at  source,  has  succeeded  in 
accomplishing  everything  that  is  really  needed  for  the  realiza- 
tion of  the  svstem  of  progressive  taxation,  without  incurring 
the  dangers  which  sometimes  attend  its  introducHon. 

The  English  income  tax  has  thus  become  a  mighty  fiscal 
and  social  engine.  Nearly  two  hundred  million  dollars  a 
year  are  now  raised  in  a  way  that  gives  perhaps  as  little 
trouble  as  any  form  of  taxation.  No  tax  can  ever  be  popular, 
for  at  bottom  individuals  are  never  sufficiently  ])ublic-spirited 
to  prefer  the  interests  of  others  to  their  own.  Under  the 
necessary  limitations  of  human  nature,  however,  it  may  be 
confidently  affirmed  that  the  Hr''tish  income  tax  is  a  signal 
example  of  how  sound  thet)ry  and  admirable  administration 
may  combine  to  overcorre  long-continued  prejudice  and  oppo- 


2l8 


The  Income  Tax 


sition,  and  may  succeed  in  rendering  acceptable  a  system 
at  first  consjderedobnoxious  and  undeserving  of  support. 

Taking  it  all  in  all,  the  British  income  tax  has  become  a 
pheromenal  success,  because  it  is  recognized  by  the  public  as 
a  loyal  and  well-considered  effort  to  accomplish  that  which 
the  people  desire,  and  in  a  way  which  commands  their  sym- 
pathetic approval. 


wtm 


The  Alodcrn  Income   Tax,  i662-igu  219 


APPENDIX    I 
Nkt  Pkodick  of  TiiK  Iniomk  Tax  roK  thk  25  V'kaks,  1886-1910 


-        "-     — 

j 

VlvAR 
KNIJIM. 
APKIl. 

Nkt  l*Ktii,ii.H 

1  Rate  ok 
Tax 

1 

Vpak 

Al'KII. 

Nki   I'koih  .  H 

Rati.  , 

1886 

/ 1 5.8 13.065 

8,/. 

'«w 

/■  i.S.274.3'; 

8,/. 

1887 

I5723.555 

8 

I  (/DO 

1S.82S.958 

8 

1888 

1 3.948.H44 

7 

1901 

29.705.312 

1   0 

1889 

12.273.521 

i       '' 

l(/D2 

35.440.070 

1 .,-» 

1890 

1 2.849.349 

'       6 

"</^3 

38.037.93  r 

'   3 

I89I 

13.295.136 

^       6 

i'/^4 

1       28.188.067 

1    I 

1892 

13.428.780 

■       (> 

K/35 

30.966.404 

1   0 

'«93 

'343'>'35 

6 

|(/j6 

3i.r)oi.237 

I  0 

1894 

15.337.000 

i       7 

K/37 

32.00j.412 

I  0 

1895 

15.056.000 

8 

K/38 

32.38o,r)00 

1   0 

1896 

16.265.296 

:     8 

1909 

33.40S.754 

1  0 

1897 

16,788.821 

8 

1910 

37. 1  00.000  ' 

r-2 

1898 

17,507.040 

8 

1  HuiIrcI  estimate.     Owing  to  the  budgi't  contest,  uniy  ii  sinaii  p.iit  was  actually 
p.aid  during  the  year. 


APPENDIX   2 


Rkcku'T  I!V  S(  iiiiiiir.Ks.  1908 -1909 


%  or   Wliril  K 

Scliedulc  A 

/  7.931.239    . 

■   23.7 

Schedule  IJ 

182.389    . 

.5 

Sclu-dule  C 

2. 108.901    . 

.     .     •    (-i 

.Schedule  I) 

20.670.226    . 

.     6r.9 

Schedule  E 

2,515,999    . 

.        .        .      7-6 

r20 


The  Income   Tax 


AITKNOIX  3 

1908-1909 

Gross  Income  brought  under  Review  for  Income  Tax  Purposes 

Schedule  A:    Lands /  51,894,826 

Houses 216,664.907 

Other  property      ....  1,329.041       /  269,888,774 
Schedule  B:    Occupation  of  lands  .     .     .  17.386,798 
Schedule  C :    Governnient  services       .     .  47,470,976 
Schedule  D  :    Business  and  professions      .  408,703,827 
Kailw.iys   in    United   King- 
dom        43,360.126 

Mines 16.614.322 

Gas  works 7.834,291 

Iron  works 5,101.350 

Canals 6.168.669 

Quarries 1.356,076 

Markets,  tolls,  etc.      .     .     .  854,269 

Fishing  and  sporting  rights  222.264 

Cemeteries 190,625 

Salt  springs  and  alum  works  91.075 

Foreign  securities  ....  18,475,404 

Coupons 15.105,979 

Railways    out    of    United 

Kingdom 23.014.330 

Loans  secured  on  rates   .     .  6,539,275 

Other  interest 5.769.524 

Other  profits 1,900,679           565.601.321 

Schedule  E :   Salaries  of  government  and 

corporation  officials      .     .  109.588.057 

1 1,009,935,926 


^tCfiSri 


\li^7: 


BOOK  II 


THE  INCOME    TAX  IX  OTHER   EURO PF. AX 
COUNTRIES 


'I  I 


-  f 


:>s^sir: 


i^'^^^u:m:i^.Z':'j 


CHAPTKR  I 


The  Income  Tax  in  Gekmanv 
§  I.    T/ie  Taxes  on  Product  and  the  Prussian  Class  Tax  of  uSjo 

The  characteristic  feature  of  the  German  fiscal  system 
during  the  first  half  of  the  nineteenth  century  was  the  taxation 
01  product.  The  mcdi:vval  system  of  the  general  nro])erty  tax 
had  long  since  broken  down  and  disajipcared  in  Germany  as 
everywhere  else.  The  general  property  tax  had  gradually 
sniit  up,  and  instead  of  being  levied  on  the  individual  him- 
self who  was  responsible  for  his  entire  property,  had  come  to 
be  assessed  on  the  things  or  the  ])articular  constituent  ele- 
ments of  property.  With  the  gradual  slipping  of  per.sonal 
property  out  of  the  assessment  list,  and  with  the  disinclination 
of  the  large  land-owners  to  subject  themselves  to  high  taxa- 
tion on  real  estate,  the  direct  taxes  were  now  in  the  eighteenth 
century  supplemented  by  a  sy.stem  of  taxes  on  expenditure, 
which  ordinarily  took  the  form  of  a  general  exci.se.  In  the 
meantime,  the  custom  had  arisen  of  assessing  property  on  the 
basis  of  the  yield  or  product,  rather  than  of  the  selling  value.' 
Thus  the  old  general  property  tax  was  replaced  b)  a  system 
which  attempted  to  reach  the  various  elements,  of  product. 
In  almost  all  the  German  states  the  system  comprised  ta.xes 
on  land  and  on  buildings  and  in  some  instances  ta.xes  on 
business  also.  At  the  beginning  of  the  nineteenth  century  an 
effort  was  made  to  round  out  the  system  by  adding  other 
ta.xes  on  product,  such  as  the  tax  on  wages  and  the  tax  on 
interest  or  funded  capital ;  and  in  proportion  as  the  taxes  on 
produce  were  developed,  it  became  possible  to  reduce  the 
general  excise. 


'  C/.  A.  Kijlle,   "Zur  EntslchunH  lier    Krlrays-  unii   Katasi-Tsteuern    in 
deutschen  Staaten,"  Finanz  Archiv,  vol.  i6  (1899),  pp.  477-496. 

22J 


lien 


334 


I  />(  Income   Tax 


\ 


%v 


Hcforc  lopfi,  however,  and  in  fact  in  some  lasos  almost  from 
the  very  outset,  imotficial  opinion  tame  to  the  roiKlusioa  tliat 
neither  a  system  of  taxes  on  product,  despite  certain  advan- 
ta^;es  of  its  own,  nor  a  system  of  taxes  on  expenditure 
availed  to  respond  in  all  respects  to  the  newer  ideas  of  ability 
to  pay,  which  under  the  inthienco  of  the  modern  industrial 
and  political  system  were  },'radually  permeating  the  public 
mind.  Accordint;ly,  wc  now  fmd  an  effort  both  to  diminish 
the  burden  of  the  exaj^gerated  excises  and  to  modiy  the  taxes 
on  product  by  a  return  to  some  method  of  personal  taxation 
which  should  be  able  to  reach  the  wealthier  taxpayers.  The 
form  which  this  personal  ta.xation  ultimately  a.ssumed  was  the 
income  tax.  Hence  the  fiscal  history  of  the  nineteenth  cen- 
tury in  the  German  states  is  a  record  of  the  gradual  disappear- 
ance  of  the  general  excise,  the  elaboration  in  some  places  of 
a  complete,  well-rounded  system  of  taxation  on  product,  and 
the  gradual  introduction  of  a  system  of  taxation  of  personal 
income,  at  first  supplementing,  and  finally  replacing,  the  older 
methods.  By  the  end  of  the  nineteenth  century  this  process 
had  been  fairly  well  worked  out,  although  it  /as  not  entirely 
completed  everywhere.  The  tempo  of  the  development, 
however,  has  naturally  varied  in  the  different  states.' 

In  Prussia,  which  we  shail  naturally  di.scuss  first  as  the 
most  important  of  the  German  states,  the  tax  on  product  had 
been  only  partially  developed,  and  the  consumption  tax  played 
the  greater  r61e.'^     The  Prussian  system,  in  the  form  which 

'  Kiir  a  general  accouiU  i.f  this  dcvcUipment  during  the  nin.teenth  century, 
see  v.in  lle.kcl,  /'/,■  Forlsihriltc  ./,  r  Pin^teii  Btiteuerun^  iii  ihn  Ddutu/ien 
S/,).i/f„.  I.oiiviK,  HK14.  (/  als.>,  for  a  n,..re  succinct  account,  the  same  author's 
Lthrbuik  ,i,-r  Fin,nizwifsfns,h:ift,  vol.  i,  1.^7,  pp.  217-338.  See  also  in  general 
Wagner,  /iii.,,n:ci>sf„.<./i,i//,  Vi.rter  Theil.  Die  Deiitiche  Btsleunun^  Jcs  ig. 
f.i>i>'iH„.f,rt,.  I.eii./ijT,  1S99.  K,,r  brief  ?urveys,  see  Conrad's  //.niJwrhrhuh 
.ler  St.u,h-viiSfnuhafl„i.  3(1  ed.,  Jena,  1909.  Cf.  esp.  ntb  -.■erho  Kinkommen- 
sleuer.  lor  the  last  few  decailes  numerous  articles  on  various  phases  of  the 
subject  will  he  found  in  Schanz,  Finanz  Archiv. 

'■'  I'or  the  fullest  account  of  the  early  period  of  Prussian  taxation,  see  K.  Mam- 
roth,  Ceuhiihtr  ,hr  /'rnisiuchen  Slants- HeUeueruitf;,  iSob-iSib.  I.eip/ig,  1890. 
Cf.  C.  Dielerici,  Zur  Ci-s,hichle  Jer  StfUfr-h'cf,<rm  in  Pr,-uttfH  vnn  iSio-lSjo. 
Berlin,    1S75  ;    J.  ( ;.  Molfman,  Di,-  l.thre  von  Jen  Sleuern.    l.eipiij;,  1840;   and 


1  '-  •-» . 


*%^^,^. 


MM^^^^^kM\Jl,l 


The  IncotHi    Tax  in   Curtnany 


325 


had  been  given  to  it  csperially  by  the  Cireat  I-ilerlm,  n.nsi.stid 
of  two  chief  j).irts ;  the  so  e.ilieil  dirett  contribution,  wlm  h 
was  a  land  tax  levied  only  in  the  niial  tiistiict^,  ami  the 
general  r.-cise,  or  so-called  universal  excise,  wliich  c. moisted 
of  a  syst.JTi  of  taxes  on  consumiJtion  applicable  to  the  towns. 
There  was  also  a  small  f,'eneral  tax  on  s  dt.  In  the  land  taxis 
there  were  all  kinds  of  exemptions,  especially  for  the  nobility, 
and  all  manner  of  variations  in  local  administrative  methods. 
In  the  towns  the  burden  was  felt  especially  by  the  poor  and 
by  the  lower  commercial  class. 

The  period  which  opened  after  the  peace  of  Tilsit  w.is 
marked  by  efforts  at  reform.  The  intruduction  of  the  modern 
system  of  freedom  of  commerce,  which  led  to  the  -  radii.ij  break- 
down of  the  Knilii  system,  not  only  destroyed,  in  part  .it  ie.ist. 
the  opposition  of  town  and  country,  but  created  a  demand  lor 
the  liberation  of  industry  from  oiijjressive  taxatinti ;  and  at 
the  same  time  the  K'<'^»''nK  movement  toward  ^;reater  fiscal 
equality  bronj^ht  into  prominence  the  idea,  voiced  bv  the 
French  Revolution,  of  taxation  accordin<;  to  .ability  or  means. 
Thus  a  double  tendency  disclosed  itself:  on  the  one  hand  the 
attempt  to  abolish  the  existinf(  privilej.(es  and  exemptions  in 
the  land  tax  a.s  well  as  to  make  it  uniform  throughout  the 
state,  and  in  the  second  place,  the  effort  to  ref(  rm  the  e\<  i.ses 
by  rcducinj:;  the  number  of  articles  li.ihle  to  tax.ition,  and  by 
supplementing  them  by  some  form  of  direct  t.ixatinu.  It 
was,  however,  only  by  slow  degrees  that  these  relorms  were 
accomplished. 

In  1810  the  movement  was  initiated  by  Ilardenberg  through 
two  enactments.  One  of  these  attemi)te<l  to  concentrate  the 
excises  upon   a   smaller  number  of    commodities.      Hut    the 

l<  flriitzer,  /ur  Cesrhulili-  ,!•■'■  /'mniJi'ii  l:iiikommfn-uii<l  Klits^tti'lruer, 
iSjj-/Sji.  Kerlin,  I.SS4.  l-.r  thr  later  |.iriu<l  an  cm  cllint  wi.rk  is  lliat  i.f 
YuntXnf^,  Ctschieh.iuki-  Entri'tckflinic;  'if  /'rfufiuhm  Sttiirr^wl-  mr  iiml  Sy^tf 
matische  Darstelluni;dfr  Finknmmensteuir.  Ikriin,  iS').}.  M.wiy  ilct.Tils  «ill  ,-iImi 
l>e  found  in  A'lulf  llfll,  Ilie  F.tnkninmfnliiifr  J-tntin-.wiiu-n-'ihitih:  lie  Slii,/ir» 
zur  Kffiiin  :lrr  Pile, ten  Slruerti  in  /Iritl  „  li.'ni,/,  lioriii.  1S72.  A  j;.  .n. I  survey 
fjr  ihr  f.irlicr  licricid  w;l!  he  ruinJ  iti  I  A.  I  I  ill,  " 'I'lir  I'ni^'ii:in  Inriitiic  T-iv/' 
Quarterly  /ourna!  0/ Economics,  vol.  vi  i'iSqj),  pp.  207  el  sei/. 


V  i 


I' 


226 


TAe  Income  Tax 


necessities  of  a  la.ge  revenue  cor  pelled  a  corresponcing  in- 
crease in  the  rate  of  the  excises  which  were  retained.  More- 
over, some  of  the  old  taxes  on  consumption,  as  well  as  some 
new  ones  like  the  grist  or  meal  tax  {Mahlstcucr),  the  meat  or 
slaughter  tax  {Sc/ilacht-  iind  Flcischsteucr),  and  the  taxes  on 
beer  and  brandy,  were  now  extended  to  the  rural  districts. 
In  the  second  place,  a  general  business  tax  ( Ct-ie/rr/Jfj/rw^-r) 
was  introduced  and  made  appUcable  throughout  the  entire 
state.  This  endeavor  to  put  town  and  country  on  an  equal- 
ity led  to  so  much  opposition  to  the  grist  tax,  especially  on 
the  part  of  the  farmers,  that  in  the  following  year,  igii, 
the  old  distinction  was  reintroduced  in  a  modified  form. 
The  reformed  excise  and  the  new  consumption  taxes  were 
now  limited  to  the  larger  towns,  while  the  ri  ral  districts  as 
well  as  the  smaller  towns  were  freed  from  the  unpopular 
grist  tax,  and  were  made  liable  to  the  slaughter,  beer,  and 
brandy  taxes,  at  a  much  reduced  rate.  As  a  compensation 
for  the  loss  of  revenue,  however,  the  rural  districts  and  the 
smaller  towns  were  now  subjected  to  a  so-called  direct  per- 
sonal tax,  which  was  in  effect  an  annual  poll  tax  of  one-half 
a  thaler  (37  cents),  for  every  one  over  sixteen  years  of  age. 
Thus  was  introduced  the  entering  wedge  of  personal  taxation. 

The  troubles  of  181 1  and  1812  led,  both  in  Prussia  and 
elsewhere,  to  some  merely  temporary  expedients.  In  181 1  a 
class  tax  was  imposed,  which  was  replaced  in  18 12  by  a  so- 
called  income  and  property  tax.  The  income  tax  wa*;  levied 
at  the  rate  of  five  per  cent  on  all  incomes  over  300  thalers, 
while  the  property  tax,  which  was  in  part  a  forced  loan, 
like  that  of  France  during  the  Revolution,  amounted  to 
three  per  cent.  These  war  measures  lasted  only  a  short 
time  and  were  repealed  in  1814.  The  income  tax  was  never 
considered  a  part  of  the  regular  system  ;  and  its  great  un- 
popularity was  to  produce  unfortunate  consequences  later  on. 

The  conclusion  of  peace  brought  with  it  substantial  addi- 
tions to  the  Prussian  territory,  each  with  its  own  system  of 
taxation.  As  a  consequence,  a  not  altogether  successful  at- 
tempt was  made  to  bring  about  greater  uniformity  in  taxa- 


\. 


■■'■£ 


The  Income   Tax  in  Germany 


227 


tion.  In  1 8 16  most  of  the  tolls  or  intcriKil  customs  duties 
which  had  been  so  widespread  in  the  Middle  Ages  were 
abolished,  and  in  18 18  a  general  customs  tariff  for  the  entire 
state  was  adopted,  with  practically  free  trade  as  between  the 
separate  provinces  —  a  great  step  forward  in  political  develop- 
ment.* In  1819  the  old  general  excise  was  definitely  aban- 
doned, and  the  excise  duties  which  were  now  made  applicable 
to  the  entire  state  were  limited  to  taxes  on  tobacco,  beer, 
wine  and  brandy.  Prussia  thus  reached  in  this  respect  a 
position  which  England  did  not  attain  until  several  decades 
later,  with  the  important  exception,  however,  that  the  salt 
monopoly  (Salcvcrkan/sn-i^al)  still  continued,  even  though 
the  old  and  vexatious  obligation  of  purchasing  a  certain 
quantity  of  salt  {Salsconscription)  was  abolished  in  1816. 

In  1820  the  business  tax,  which  was  now  uniform  through- 
out Prussia,  was  remodelled.  The  various  kinds  of  business 
were  divided  into  a  number  of  classes,  some  of  which  were 
taxed  according  to  external  criteria,  as  in  F" ranee.  In  other 
cases,  however,  the  interesting  expedient  was  devised  of 
assessing  a  lump  sum  upon  the  particular  trade  as  a  whole  in 
each  locality  and  then  providing  for  a  repartition  of  a  tax 
to  each  individual  through  the  medium  of  tax  associations 
{Steuergcsellscliaftcn)  —  one  ''n  each  trade.  As  a  matter  of  fact, 
although  it  is  not  commonly  known,  this  was  an  old  scheme, 
which  can  be  traced  back  to  medicEval  Spain. '-'  Thus  was 
attained  a  kind  of  personal  tax  in  indirect  fashion ;  but  the  tax 
was  light  and  the  yield  very  small.  In  1822  a  new  and  uni- 
form stamp  tax  was  imposed,  which  replaced  all  the  local  and 
provincial  stamp  taxes.  In  the  case  of  the  chief  source  of 
revenue,  however,  —  the  so-called  land  tax,  which  was  actually 
a  tax  on  all  real  estate,  —  it  proved  to  be  impossible  to  bring 

'  This  aspect  of  the  law  is  well  cluci<lateil  in  <!.  SchinulUr,  h'ntur.iiireJe  uher 
das  Preussisdie  f/aiiJels-  um'  /.ollt;eietz  Ton  /SrS.  llcrlin,  iSyS.  ('/'.  also  the 
same  author's  "  Die  Kpochcn  (Lr  Preussichcn  Miian/politik  "  in  Ili'lt/endorff- 
Brenlano's /(////•/'«,//  /«/-  Ceselzgehuiig,  etc.,  vol.  i  (1877  1,  pp.  ji  et  ift/. 

^  The  same  is  true,  as  wo  have  seen  above,  p.  52,  of  the  Iremh  Tinxti!i>iis 
i/'iiic/ustrif.  Wagner  was  evidrnlly  ienorant  of  l)oth  these  facts  when  he  sp(jke 
of  the  Prussian  system  as  a  •' Sin^ularitiit."     J-iniin:wisieiis,ii.ij't,  <i/>,  lil.,  p.  20. 


^i 


!l 


228 


The  Income   Tax 


■  s 

I 


I: 


=  1 


about  the  desired  uniformity,  the  only  general  regulation 
which  it  was  practicable  to  enact  being  to  the  effect  that 
wherever  the  tax  had  been  introduced  or  increased  since  1789 
it  should  not  exceed  one-fifth  of  the  net  produce. 

The  chief  feature  of  the  legislation  of  1820,  however,  con- 
sisted in  the  introduction  of  the  class  tax.     The  government 
was  not  favorable  to  an  expansion  of  direct  taxation,  but  the 
growing  fiscal  needs,  combined  with  the  unalterable  opposi- 
tion of  the  rural  districts  to  the  grist  tax,  left  the  government 
no  alternative.     As  a  consequence  a  law  was  now  enacted 
whereby  the  whole  country,  with  the  exception  of  the  larger 
towns,  132  in  number,  was  compelled  to  pay  in  addition  to 
the  land  tax  a  so-called  class  tax.     According  to  this  law  the 
population  was  divided  into  a  small  number  of  categories  or 
classes,  differentiated  according  to  simple  external  criteria 
like  social  standing,  occupation,  general  estimate  of  wealth, 
and  ordinary  mode  of  life.     The  same  sum  was  payable  by 
each  household  in  the  class.     In  the  original  bill  provision 
had  been  made  for  four  classes,  but  the  law  as  enacted  in- 
creased these  to  six,  and  in   1822  a  final  arrangement  was 
made  providing  for  a  still  further  classification  into  four  chief 
sections,  with  three  sub-classes  in  each;  that  is,  in  reality, 
twelve  classes.     The  rates  varied  from  a  minimum  of  one-half 
a  thaler,   in   the    lowest   sub-class,   to     144   thalers   in    the 
highest  class.i     Liability  to  taxation  began  at  the  age  of  14 
(changed  in   1828  to  16),  and  ended  at  the  age  of  60  (as 
changed  by  the  law  of  182;).     In  the  132  larger  towns,  how- 
ever, the  class  tax  was  not  levied.     They  were  liable,  in  addi- 
tion to  the  light  business  and  stamp  taxes,  only  to  a  combined 
grist  and  slaughter  tax,  the  administration  of  which  rendered 
necessary  a  continuation  of  the  octroi  or  local  customs  duty. 
It  was  provided,  however,  that  if  the  city  so  chose,  it  might, 
with  the  consent  of  the  general  government,  vote  itself  liable 
to  the  class  tax  instead  of  the  grist  tax,  and  the  privilege  of 
an  inverse  choice  was  conferred  on  the  rural  districts  and 

'  Ihe   exact   rates  were    half  a   tlmler,  2,  3-4,  6,  8-12,   18,  24-48.  96,   144 


^k 


-^^im^ssr^ii/asmR^^mmfmBk^wwsaissm'  -.  irm 


The  Income   Tax  in  Germany 


229 


towns.  A  number  of  cities  exercised  tliis  right,  so  that  by 
1 85 1  only  83  were  left  in  the  category  of  grist-tax  cities. 
The  relative  importance  of  the  three  direct  taxes  in  1821  may 
be  inferred  from  the  fact  that  in  that  year  the  land  tax  yielded 
9,878,752  thalers;  the  class  tax,  6,285,874  thalers ;  and  the 
business  tax,  1,706,234  thalers. 

The  class  tax  seemed  to  many  to  be  the  pro})er  solution  of 
the  problem.  The  ministerial  ordinance  of  1820  tells  us  that 
it  "  is  entitled  to  be  the  happy  medium  between  an  income 
tax,  which  is  always  odious  because  it  cannot  be  enforced 
without  an  inquisitorial  inspection  into  the  conditions  of  the 
taxpayer's  wealth,  and  a  poll  tax  levied  at  the  same  rate  on 
the  whole  population,  without  any  differentiation.  It  is  in- 
tended to  reach  the  various  classes  of  taxpayers  according  to 
a  gradation  resting  on  a  few  easily  visible  criteria."  And  it 
adds :  "  In  order  not  to  let  the  tax  degenerate  into  an  .ncome 
tax  we  must  be  careful  to  avoid  putting  into  the  figures  any 
definite  amount  of  th-^  property  or  income  of  the  members  of 
the  various  classes.  .  .  .  The  notorious  mode  of  life  and 
the  taxpayer's  own  view  of  the  situation  will  thus  take  the 
place  of  the  very  odious  inquisition  which  is  moreover  least 
of  all  suitable  for  a  tax  that  endeavors  to  reach  so  small  a 
part  of  a  man's  income." ' 

The  general  principles  underlying  the  class  tax  were  per- 
haps most  emphatically  defended  by  Hoffmann,  the  author 
of  the  weightiest  German  book  on  taxation  in  the  first  half  of 
the  century.*  Hoffmaim  calls  attention  to  the  fact  that  in 
the  existing  structure  of  German  society  there  were  in  reality 
four  sharply  differentiated  classes.  In  the  country  one  could 
easily  distinguish  between  the  large  landowners,  the  smaller 
farmers,  the  peasants  and  the  agricultural  laborers.  In  the 
towns,  also,  a  similar  distinction  was  to  be  drawn  between  the 

'  The  ordinance  will  he  found  in  Held,  o/.  dt.,  p.  275. 

* /)/>  /.fhif  von  dtn  Steutrn  aU  .UiUiluin;  lu  grUH<lluhen  Vrthriltn  iitir 
d'ls  Steuer-.vesen  mil  besomlerer  Hezithunjf  aiif  den  prtumuhen  Stmit  7oygttnigeii. 
Von  J.  (i.  Hoffmann  lierlin,  1840.  if.  aUo  V .  (1.  Schimmi  Ipfrnnij,',  lU,  frrus- 
siulien  direkttn  Stniern,  2  vols  ['.■Islam.  1843;  «nd  esperially  Sinnhul.l,  /Ue 
A'lin^eii>/tutn'erfassuii^  Ji^  I'leiissuchcn  Mioh.     l.iegmtz,  1S31. 


■ 'i^-ir?^  •:iis^^m^^^ss^wss^3smmn^!ss' 


>!    • 


230 


The  Income  Tax 


r!l 


\r    1; 


large  capitalists,  the  higher  middle  classes,  the  small  trades- 
men and  the  day  laborers.  Hoffmann  therefore  considered 
the  class  tax  far  superior  to  any  practicable  income  tax. 

From  our  point  of  view  it  may  be  conceded  that  the  class 
tax  was  perhaps  as  great  a  step  in  advance  as  was  possible  at 
the  time.     As  Gncist,  the  distinguished   jurist,  forcibly  ex- 
pressed it  many  years  later:  "The  founders  of  the  class  tax 
and  especially  Hoffmann,  with  that  practical  insight  which 
characterized  them,  recognized  that  an  income  tax  could  not 
be  forthwith  introduced  among  a  people  where  more  than 
nine-tenths  of  the  families  were  not  accustomed,  nor  even  able, 
to  calculate  their  revenues  and  expenditure  in  money,  and  to 
strike  a  balance  of  income.     It  was  also  recognized  that  even 
for  the  privileged  and  exempted  classes  of  the  population,  an 
assessment  of  income,  without  reference  to  any  personal  dis- 
tinctions, would  .seem  to  them  as  unfamiliar  as  it  was  in  con- 
tradiction to  their  conceptions  of  rank."  >     Entirely   apart, 
however,  from  the  fact  that  the  ch.ss  tax  did  not  apply  at  all 
to  the  large  cities,  it  carried  out  only  to  a  very  slight  degree 
the  principle  of  ability  to  pay,  and  possessed  no  machinery 
calculated  to  make  the  enrolment  in  the  various  classes  con- 
form to  the  real  wealth  of  the  taxpayers.     In  fact,  even  by 
1846  there  were  only  346  persons  enrolled  in  the  highest  class 
paying  144  thalers  annually.^     The  overwhelmingly  large  part 
of  the  yield  was  derived  from  the  lower  and  the  lowest  classes. 
It  was  therefore  inevitable  that  after  a  time  the  demand  for 
putting  a  greater  share  of  the  burden  on  those  better  able  to 
pay  should  make  itself  heard.     This  demand  took  the  form 
of  a  recommendation  of  the  income  tax. 


Ill 


§  2.    TItf  Morcmrnt  tozcard  the  Income  Tax 

The  general  opinion  as  to  the  desirability  of  an  income  tax 
was  considerably  divided.  Among  the  public  at  large  and  in 
government  circles  the  judgment  was  undoubtedly  adverse, 

'  Pie  Preussische  / iiiain  Reform  durch  A'^^ii/hiiiitr dr>-  C?.-/.'.-.  .•.•.•..•^-c.'.«.-r>;,  \'..n 
Rudolf  (;n<ist.     Ikrlin,  iSSi.  -'  l|,  i,|_  ,,^.,  , ,,,_  ,,   ^yj. 


^'^ 


The  Income   Tax  in  Germany 


231 


for  very  much  the  same  reasons  that  hail  made  the  old  in- 
come tax  so  unpopuhir  in  l-'.ngland.  Amonj;  the  scientists 
the  matter  was  slightly  different.  The  old  writers  on  linance 
during  the  first  half  of  the  nineteenth  century  were  for  the 
most  part  content  to  adopt  Adam  Smith's  first  rule  (which,  it 
will  be  remembered,  declared  that  the  norm  of  taxation  was 
the  revenue  that  the  individual  enjoyed  under  the  protection 
of  the  state),  without,  however,  taking  up  in  any  detail  the 
question  as  to  whether  this  general  ideal  was  to  be  reached  by 
an  income  tax.'  When  they  began  to  discuss  the  income  tax 
as  such,  most  of  the  ruthoritative  writers,  like  Ran,  preferred 
a  continuance  of  the  system  of  taxes  on  product  as  it  existed 
or  was  1  ing  developed.''*  On  the  other  hand,  .so  |)rominent 
an  author  as  Murhard  was  a  warm  advocate  not  only  of  an 

'The  must  important  (if  these  writers  wi-re  :  — 

C.  Kroncke,  Dm  Stt-iier;veien  ii/nh  srtner  A'lilur  uih/  ll'ii iwini^rn  itnlfnm/it. 
Darmstadt,  1S04;  anl  .tiis/ii/irhi/ir  Anltituiii;  ziir  AVx'it/irtiin'  ,1,'r  Stiuirii, 
(jiessen,  1810;  Christian  vim  Sihlu/Lr,  .tn/aii);\i;iii>ii/r  :lri  Sl,i,itK;i'iitliiiliiift. 
Riga,  1805;  Stockar  vun  Nuuforn, /zHi/WiTfiMjci/j. ';.;//.  Kutlu-riljiii^;,  iSoS;  1).  I[, 
Eschenmayer,  I'orsc/ilui;  zit  ehiii/i  niifiuhen  Sleumyiteme.  I  liiili  llnrj;,  lS<.)S 
[K.  was  upposdl  ti)  the  excise- ] ;  J.  I'.  Ilarl,  V'i>lhtiiiiJi^f\  /'/h;t)  r/iu/i-f'iiittisihrs 
Hiindt'uch  der  ges<im>nttii  Sliiiimi^iilirmigen  odcr  der  SttUiiun\sfinihitft.  Kr- 
langen,  1S16;  K.  Kn'mikf,  I'ehfr  die  di  iinihrilir  riiirr  f^er,ilil,n  lUslnteruni;, 
Ileidclberj;,  1S19;  1).  Krchl,  Pus  Sleuersyitem  nnih  den  (i'riiiid,lilzfn  di-.t  Sf,i,it!- 
reehHundderSlaats'iiirt/tsi/iii/t.  ICrlangcn,  iSid;  (ieur^  V .  v.  Sailnriu-,  I'eher dtf 
gleiche  litstfutruns;  d-s  K'hnigrtiiiis  Il'innoier.  (iiitlin^in,  iSii;;  W.  |.  liilir, 
Die  I.ehre  von  der  Wirtlinhaft  des  .Slaals,odir  I'rai'mitti.i/ie  Theio  ii-  der  l-in.iiiz- 
gesekgel'ung  und  liniinyi'e'umllun:^.  I.iip/if;,  1K22;  |.  1'.  K.  \.'Ai,  llnndhiiih 
der  Slaatswtrt/isi/t<if/lehre.  I'.rlaiijjon,  1S22;  I..  H.  von  Jakoli.  /)ie  .Stint/s/hi.iiiz- 
■wimnchaft  theoreliichund praktiithdari;,-5tellt.  Ilallc,  1.S2 j;  A.  S.  von  Kriinor, 
DarsUllungdes  Steii.:rwi-ent.  VVicn,  I.S.!5;  (,".  A.  von  Male  hus,  llandbuilt  der 
finanz-tvissenschii/t  tiitd  Fin'inz-enwlluiit;.  SliiUjjart,  iSjn;  !■'.  C.  I'liMa, /A;h./- 
buchder  FinanZiViuenscliafl.  Tiiliinfjcn,  lS-'7;  and  I'el'er  die  ll'irliiin;  der  rer- 
schiedencn  A--ten  drr  Sicuern  >iuf  die  Mornlitiit,  dnt  /■lei\'.,  iind  die  liidu.lrie 
des  I'olks.  Stiittijart,  rSj7;  j.  i^hiiit, /)ie  0'ruii,/>ii/ze  der /iii,ni:.  /-.iti,  iri/:s, /le 
Entwuieluni;.  Brcslau,  iHj;;  A.  I..  \'.  Scatter,  Die  /le^/,ueriiii^  drr  I'iUker, 
rechts-  und  geldwi'sen'.'-hnfilirh  unlerMnht.  Sjioycr,  1S2S;  K.  V.  Hotteck, 
Ijhrbuch  der  okonomischen  I'olilik.  lH?i;.  A  fuller  Irratim-nt  of  sonic-  of  these 
authors  will  be  found  in  Seligman,  I'm^rev.ive  'J'malioii,  2d.  i:d.,  Ii/)S,  |i|).  176 
tt  seq.;   187  ^/  s^-i/. 

2  Ku:!     H.     V.i-i,    G-r-lf:;'-   d''r    /V;;.->;-r;;/:t<-«  .A;;/?.        l8;2     i;  !  !tdd,   rV». 

«■!/.,  p.  248,  attcmjits  rather  unsuccessfully  to  explain  away  Kau's  ol),-.tions. 


1(1 


» 


'Ml 


Ei 

il 


232 


TAr  Income  Tax 


income  tax,  but  of  a  single  income  tax  to  replace  all  the  exist- 
ing taxes  on  product.* 

This  discussion  of  the  single  tax  in  Germany,  of  which  we 
have  only  sporadic  examples  in  the  earlier  period,*  came  into 
the  foreground  as  a  result  of  the  fiscal  reform  in  Saxony. 
The  Saxon  system  was  a  survival  of  earlier  conditions,  con- 
sisting of  an  old  land  tax  and  a  combination  of  business  and 
poll  tax  known  as  the  Quatembersteucrn.  The  latter  had  be- 
come of  minor  importance  since  the  introduction,  at  the  be- 
ginning of  the  eighteenth  century,  of  the  general  excise 
supplemented  by  a  grist  tax.  When  the  constitution  of  1831 
was  adopted,  and  especially  after  Saxony  joined  the  customs 
union  (ZoUvcrein),  thus  instituting  a  reform  of  existing  tax 
methods,  preparation  was  made  to  introduce  a  more  equitable 
system.  A  number  of  pamphlets  now  appeared  containing 
the  suggestion  of  a  single  income  tax.  Among  these  the 
most  important  was  by  Lucius,  who  was  an  enthusiastic 
advocate  of  the  scheme.^  An  attempt  to  refute  the  views  of 
Lucius  was  made  by  an  anonymous  writer.*  In  this  work, 
which  contains  good  arguments  designed  to  show  that  the 
fiscal  difficulties  would  be  aggravated  by  any  kind  of  a  single 

>  Karl  Murhard,  Theorie  und  Politik  tier  Bnteuerung.     Oiittingen,  1834. 

»  Cf..  for  instance,  A.  Lips,  Veher  >Ut  allein  If^a/tre  umi  Eimit^e  Sttutr,  die 
Einkommtntiixt  und  ihrt  Amfiihrharkeit,  Krlangen,  1812.  The  same  idea  wa« 
repeated  in  his  Deu/srh/and's  S\Uional-Oe,onomie.  Giessen,  iSjo.pp.  210  ct  seq. 
See  also  Hreiten^tein,  Xiir  F.ine  Sleutr  und  dertn  Catastriyiiitg,  l.rhehung und 
Verrechnunf;,  mil  rorami^fschuktfr  praktisclur  Betrachlung  aller  hisherigin 
directen  und  indhtcten  Aufiagtn.  (Jotha.  1826.  The  essay  of  Lips  was  sharply 
criticised  by  Strelin,  Keviiion  der  Itlire  von  den  .luflagtn.  Erlangen,  i8Jl,  pp. 
113  ft  sfq.  Cf.  alsoSecger,  Ufhir  das  voriUglicltste  Ahgahensysttm.  ^1.  ed.,  1815. 
A  somewhat  later  discussion  may  be  found  in  the  anonymous  Ueher  ,erH!Ulniss- 
m(i!sige  Brtaurung  oder  -.vie  Jrder  St<tiits,ingehorige  narh  der  Grilsse  seiner 
JSnanzieUen  Kraft  ;«  den  All^emeinlasten  beitragen  lulirde.     Leipzig  i8h- 

»  Plan  lur  Kinftihriing  etner  Sieuer  im  h'onigreic/te  Sachsen.  Vom  (Jerichtt- 
director  und  A(!vocat  Luoius  in  Borna.  Leipzig,  1833.  A  similar  pamphlet  was 
is5ue<l  by  Cunow  which,  however,  simply  repeats  the  arguments  of  Lucius. 

*  Die  F.iiikommensstei/er  als  Eintige  Ahgahr,  aus  stanlsrechtlirhem,  national- 
okonomisihem  und  fuian-.t/l!em  Ce^i.htsf'uncte  uiiJ  mil  lvs,'ii./erer  Heziehung  auf 
dfH  v-"'i  Ge'^i:':!:-P:  rcirr  lucius  her.ius^.-ger.cili.t  liuiienlwurf  beUuditet. 
Von  W.  R.     Leipzig,  1833. 


The  Income   Tax  in  Genua  iiv 


'■i2> 


tax,  the  author  iiivcighcd  against  the  use  i)t  the  income  tax  at 
all,  and  gave  a  peculiar  interpretation  ot  tlie  luiglish  income 
tax  in  order  to  bolster  up  his  theories.'  He  concluded  with 
quoting  from  a  nameless  writer  whom  \\c  characterized  as 
"  one  of  our  grcate'Jt  and  most  experienced  fiscal  experts,"  as 
follows:  "I  consider  the  income  tax  an  instructive  and 
horrible  example  of  the  radical  unsuitability  of  all  direct 
taxes  designed  to  produce  great  results,  and  as  a  striking  proof 
of  the  error  of  all  the  delusive  theories  which  attempt  to 
show  that  this  tax  is  bound  up  with  the  liberty  and  prosperity 
of  nations."  '■' 

The  Saxon  government,  while  not  inclined  to  the  scheme 
of  Lucius,  was,  nevertheless,  induced  to  adopt  a  part  of  his 
project  and  succeeded  in  1834  in  enacting  a  law  for  a  new 
business  and  personal  tax  {Gexverbc  niitl  Piisonalstiiier). 
The  business  part  of  the  tax  was,  like  its  Prussian  prede 
cessor,  based  on  e.xternal  criteria.  The  personal  part  of  the 
tax  likewise  endeavored  to  reach  by  indirect  methods  all 
other  incomes  except  those  from  land,  which  were  supposed 
to  be  hit  by  the  land  tax.  The  administrative  methods  of 
both  parts  of  the  tax  were  so  arranged  as  to  avoid  as  com- 
pletely as  possible  all  inquisitfnial  procedure.'' 

The  Saxon  development  exerted  at  the  time  no  further  in- 
fluence either  in  Prussia  or  in  the  other  German  states.  With 
the  enactment  of  Peel's  income  tax  in  ICnglaiid,  however, 
and  especially  with  the  democratic  upheaval  of  1848,  the 
inadequacy  of  the  Prussian  class  tax  forced  itself  upon  popu- 
lar notice  and  led  to  a  determined  effort  at  reform. 

The  ball  was  set  rolling  in  1842  hy  Hcnda,  who  was  a 
violent  opponent  of  the  modern  system  of  ])ublic  debts,  and 
especially  of  what  he  called  the  "stock-exchange  swindles." 

'  He  iii.iimained,  fur  instance,  that  lli<-  vnWti'  luinlcn  "I  iIil-  I'.nt-lisli  imc.nif 
tax  ha.l  fallen  on  the  landowners  and  the  salaried  classes,  and  that  the  tax  liad 
been  abolished  for  this  reason.  —  ice  y>.  36. 

*  Of.  cit..  p.  48. 

'  C/.,  for  a  s-rrrnary  ':f  thr  Ir'^iN -f  th"-  !aur,  7.:t:rhrift  df>.  Kdnn-'iJirn 
Sachsichen  Slalntnchen  liuroim.     \.n\u\^,  1.S5S,  |>|).  55  tt  iry. 


mm 


n 


J 


*fj4 

III 

i  ■  f 

'.J 


1    i. 

''  I.. 


i^^ 


234 


T/te  Income  Tax 


Bcnda  emphasized,  in  a  somewhat  exaggerated  fashion,  the 
social  aspects  of  the  income  tax,  and  especially  its  efficacy, 
when  levied  at  a  high  rate  on  the  wealthy,  in  cutting  down 
the  public  debt.'     A    far  weightier   production  was  that  of 
Sparre,  an  official  who,  as  we  are  told,  had  occupied  himself 
for  twenty-three  years  with  the  Prussian  class  tax.     He  called 
attention  to  the  fact  that  while  at  the   time  the  income  tax 
was  everywhere  so  warmly  desired,  most  people  did  not  know 
what  was  really  meant  by  it,  or  how  it  ought  to  be  arranged.^ 
Sparre  held  that  a  (''rect  income  tax  was  far  preferable  to 
what  he  called  indirect  income  taxes,  based  on  mere  presump- 
tive evidence.     He  worked  out  in  detail  the  administrative 
methods  of  his  suggested   impost,  taking  up  among  others 
the  moot  questions  of  differentiation  and  progression.     He 
freely  admitted  that  the  country  was  not  yet  quite  ready  for 
the  income  ta.x,  but  he  predicted    for  it  a  "great,  even  if  a 
distant,  future,"  and  maintained  that  it  would  gradually  take 
the  place  not  only  of  the  most  burdensome  existing  indirect 
taxes,  but  also  of  the  most  important  direct  taxes,  so  that 
ultimately  the  fiscal  system  would,  in  his  opinipn,  be  com- 
posed primarily  of  an  income  tax  and  of  a  few  great  indirect 
taxes  on  expenditure.     "  The  income  tax."  said  he,  "  is  a  tax 
on  the  new  citizenship  {BiirgertJmm)  which    is   still  in  the 
making."      Sparre  disposed  of  the  chief  objection,  namely 
that  the  administration  of  the  income  tax  would  cause  a  prying 
into  people's  affairs,  by  asserting  that  self-assessment  without 
inquisitorial  methods  could  be  made  to  suffice,  but  that  even 
if  some  compulsion  were  needed,  too  narrow  a  view  must  not 
be  taken,  for  in  reality  "  the  state  is  mankind's  great  educative 
institution."  3 

In  a  second  edition  published  six  years  later,  Sparre  con- 

'  Honda,  Peers  Finanz  System.     Leipzig,  1842. 

'^Die  alli;emeine  Einkonimemteuer  ah  tiinige  gerechte  Jirecle  .Ihr.ih,  aiis 
Theorie  unJ  Erfahruni;  na.hge-.viesen.  Von  K.irl  v.  Sparre.  Ciesscn,  1S48, 
p.  vii.  Sparre  also  published  a  separate  w.irk  on  the  Prussian  system  entitled  DU 
J'reussiehe  Classemteuer  un.i  M.ihl-  unJ  Sihiachtsteuer. 

2  "Her  Staat  ist  cine  Erziehungs-anstalt  fiir  das  \!=-n^.h<-;!goschlecht."  Sec 
p.  89  uf the  2d  ed. 


^y^m. 


The  Income   Tax  in  Gifmanv 


J  35 


ceded  tliat  his  orij^inal  scheme  was  premature,  and  tliat  for  a 
long  time  to  come  only  a  partial  income  tax  was  possible. 
He  therefore  changed  the  title  of  his  book  '  and  discussed 
primarily  the  eventuality  of  such  a  tax.  He  was,  however, 
still  firm  in  his  conviction  that  that  would  be  only  a  half- 
measure,  and  he  deplored  the  government's  "  lack  of  courage 
in  not  throwing  overboard  all  the  old  direct  taxes."  "  Only 
shyly,"  he  tells  us,  "  is  our  government  grasjiing  at  the  partial 
income  tax,  leaving  it  unsuitably  enough  as  a  subsidiarv  and 
sup[)lementary  impost  to  be  added  to  old  taxes  which  have 
long  since  been  condemned  by  science  ami  sentenced  by 
experience.  Let  us  hope  that  the  future  will  show  the  in- 
adecpiacy  of  all  such  makeshifts."*'' 

Other  writers  did  not  fail  to  take  the  cue  and  even  to  ex- 
aggerate the  scheme.  Freiherr  von  Gross,  a  niembcr  of  the 
National  A.ssembly,  suggested  in  1848  an  income  tax  with 
progressive  rates  running  up  to  thirty-three  and  one  half  |)er 
cent;''  and  Ziegler,  the  mayor  of  Hrandeid)urg,  proposed  in 
1850  to  replace  all  the  existing  direct  taxes  by  a  progressive 
income  tax,  having  succeeded,  as  he  tells  us,  temporarily  at 
least,  in  introducing  the  system  in  his  native  town.^  Perhaps 
the  extreme  glorification  of  this  single  tax  idea  is  found  in  a 
production  of  von  Graffenried,  who  deduced  his  scheme  from 
the  old  theory  of  taxation  as  an  insurance  |)remium.^  These 
enthusiastic  projects,  however,  soon  engendered  a  host  of 
objections.  Baumstark,  a  weighty  disputant,  declared  that 
"the  income  tax  is  a  growth  cultivated,  although  by  no  means 
discovered,  by  the  German  Revolution,  as  well  as  a  product 

^  Die  aUi;emeine  un</  i/ie  f<iirlie!li-  l:i»kt>iitnienitfiifr,Vfi)^li,lifii  mit  iln-  hn- 
herigen  Steiifrtlieorie  unJ  rrarn.     /wcitc  Aiilla^L-,  Krankfurl  a/M,  iH5.(. 

-  "  Xur  schiiihtcrn  grcift  nian  /u  <ler  particllun  uml  liis/l  »ie  als  liii  <<iilisicli;irc<( 
und  supplementares  Wesrn  lubfn  alien  Stiutrn  uiipasscnil  j;<'""K  licrni  hen.  ilir 
langst  von  iler  Wissenschaft  f;<rii  htL-t  und  von  ili:r  KrfahrunK  vcrurthcilt  sinil. 
Ilijffcn  vvir  ahcr,  dass  die  Zukuiift  die  l'n,'iil5n;;lichkcit  allrr  solihrr  N'(ithl)e- 
helfe  aufdringt-n  werde." —  ('/.  (it ,  p.  <)<). 

"  Freiherr  vin  (jruss,  All^fmeme  rr,yre:iivf  (irunJ-  unil  J-.iniommein/fuer. 
GUiches  Maai  und  Gfwi<ht  fur  DeulichlanU.     1848. 

«  Held,  cp.  :::.,  p.  2yy. 

'  Von  Graffenried,  L'ler  die  /■.inkommtmleuer.     Ziirich,  1H55. 


i 
'  I 


236 


The  Income  Tax 


of  bitter  sentiments  and  unclear  ideas."  '  He  preferred  taxes 
on  special  kinds  of  income  to  a  general  income  tax.  A  le.ss 
important  writer,  yuariziiis,  entered  the  lists  against  Sparre 
and  stated  that  "it  would  be  a  relatively  simple  matter,  scien- 
tifically to  refute  the  sanguine  admirers  of  the  income  tax."' 
His  own  refutation,  however,  was  far  from  scientific,  for  he 
based  his  criticism  chiefly  on  a  general  opposition  to  the  in- 
crease of  any  direct  tax,  for  the  reason  that  it  would  prevent 
the  rich  from  employing  the  poor,  and  would  thus  directly 
increase  pauperism. 


§  3.   From  the  Revolution  0/1848  to  the  Franco- Prussian  War 

On  the  whole,  however,  it  may  be  said  that  the  democratic 
movement  at  the  end  of  the  forties  was  distinctly  favorable 
ti  some  kind  of  an  income  tax,  designed  to  alleviate  the  exist- 
ing burdens  of  the  poor.  In  Baden,  for  instance,  there  had 
been  since  1820  a  cla.ss  tax.  But  this  tax,  which  was  in- 
tended to  supplement  the  land,  building,  and  business  taxes, 
applied  only  to  incomes  from  wages,  salaries,  and  pensions. 
A  remarkable  feature  of  the  tax  was  the  application  of  a  pro- 
gressive scale,  the  rate  rising  from  one  and  two-thirds  per 
cent  in  the  lowest  class  (i  kr.  per  gulden  up  to  fl.  1000) 
to  sixteen  and  two-thirds  per  cent  on  the  highest  class  (to  kr. 
per  gulden,  above  fl.  80,000).  The  revolutionary  movement 
of  1848  accordingly  brought  with  it  a  demand  for  some  tax 
to  reach  the  revenue  of  the  wealthier  classes  in  general.  While 
the  project  of  an  income  tax  failed,  the  agitation  resulted  in 
the  imposition,  in  1848,  of  a  so-called  capital  tax  —  or  what  we 
in  America  should  call  a  tax  on  all  intangible  personalty.^ 

'  "  Kin  vun  (Icr  Deutschen  Revolution  gepnegtes  wenn  auch  koineswegs 
entdccktcs  Uewachs,  ein  Product  bitterer  Fmplin.iungen  und  unklarer  Vontel- 
lungcn/' —  Hauinstark,   Ziir  Ehikommtnsteuer.     Greifswald,  '850,  p.  27. 

"  Quari/ius,  Die  Einkommemteuer.     Weimar,  1853. 

'  Cf.  in  general,  fur  the  fiscal  history  of  Baden,  I.ewaM,  "  Die  Direkten 
Steuern  in  Hadcn."  Finnn-  ;r,/;,7,  v..!.  iii  riSSil.-iji  -.,.  ./;-.,...  -r,.^  T'h^'i--.- 
povich,    Der   Hadiiclu   J/aushait   von  jSOS-jSSg.     Freiburg,  1889.     A  shorter 


The  Income   Tax  in  Germany 


237 


An  intercstinR  innovation  of  the  same  year  was  the  introduc- 
tion of  a  so-called  Coiiniil  of  Assessment  {Scluit^iin^^iuttliX  a 
small  body  elected  by,  and  directly  representing,  the  taxpayers 
and  designed  to  assist  the  official  commissioners  in  assessing 
the  new  capital  tax  as  well  as  the  old  class  and  business  tax. 

The  movement  found  its  most  extreme  expression  in 
Havaria,  where  the  law  of  1848  actually  introduced  not  only 
a  capital  tax  but  also  an  income  tax.  These  two  taxes  were 
combined  in  1850  into  a  general  income  tax,  with  a  normal 
rate  of  two  per  cent  and  with  abatements  for  lower  incomes. 
The  law,  however,  was  defective  in  that  the  tax  was  super- 
added to  the  existing  taxes  on  product.  Above  all,  the  ad- 
ministrative machinery  was  woefully  inadequate.  It  worked 
so  badly  and  gave  rise  to  so  many  complaints  that,  with  the 
subsidence  of  the  revolutionary  enthusiasm,  the  tax  was  virt- 
ually abolished  in  1856.  The  name  indeed  remained,  but  it 
now  applied  only  to  incomes  which  wore  supposed  not  to  be 
reached  in  some  way  by  the  remaining  taxes.  Practically  it 
became  a  tax  on  wages  and  .salaries  only.'  In  Hesse  also 
an  income  tax  was  introduced  in  1X48,  applicable  to  all  in- 
comes not  subject  to  the  land  and  business  taxes.  This 
likewise  proved  to  be  a  failure."  Finally,  in  the  city  re- 
public of  Hrunicn,  an  income  tax  was  introduced  in  1848, 
resting  on  a  system  of  self-as.sessmciit  which  had  long  been 
practiced  there  in  connection  with  the  old  property  tax  and 
which  for  that  rea.son  worked  fairly  well.'' 

The  Prussian  government  also  was  intlueiirod  by  the  .same 

account  will  lie  f^u.-il  in  A.  \\  agnur,  Finnnzioi^'fiiulin/t,  i'tfitrr  I'lirH,  /-,v,itfr 
Hnlhhnnd.  1901,  pp.  245  e!  V//.  I'ur  thr  lawi  thriinclvc"!,  we  I'liilippovii  h, 
G tittle  Ubtr  Jit  IHrtkten  Shuern  in  liadtn.     I'reiliurj;,  iSSS,  2  v^ils. 

'  Cf.  S.  (jerstntr.  Dm  linvri  ihe  /.nUommrn-  uitil  h'lipifnlriii/rii^triir'xrsrli. 
Krhngcn,  1858.  SenaUci  I..  Il..ffiiiarm,  (iesthiihlf  .h-r  Jirektni  \tiHri  n  in  liiiiii  11 
rt'in  I  -t-iQ  JtihihunJtrl.  I,t.-ip/i>;,  iS.Sf;  .in  1  V...  ki-,  "  l!citra^;i:  /urdrsclii.  IiIciUt 
Finkcimmensteu  r  in  ItaiL-rn,"  Tiil-ini'f  /.rit^t'inft,  \iM.  tn  .in. I  .'I.  ( '/.  .iNo 
Schanz,  "  Das  Hayrischi-  Ertrag!stcucr»y»ttin  uml  seine  Entwii  kelunj;,"  Itiuinz 
Archiv,  vol.  xvii  (1900),  pp.  551-772. 

-'  Cf.  the  article  by  Schan/,  "  Die  direkten  '^tciurn  1  lessens  und  .leren  neueslc 
Reform,"  Finait-    Ir.An,  vmI.  2  flSSO.  I'P    2i^~iSi. 

'For  a  good  account  of  thii  see  \Sa}{ner,  />/>  at.,  pp.  622-629. 


] ,' 


[l 


»38 


TAe  Income  Tax 


tendency,  and  in   1847  introduced  a  bill  to  abolish  the  grist 
tax  and  to  make  ail  persons  with  an  income  of  over  4CXJ 
thalcrs  liable  to  an  income  tax  at  the  rate  of  three  per  cent 
for  funded  incomes,  and  two  per  cent  for  unfunded  incomes. 
Those  with  incomes  below  400  thalcrs  were  still  to  be  sub- 
jected to  the  class  tax.     Minister  Campluiusen  defended  the 
measure    in  an   eloquent   speech   in  which    he    pronounced 
himself  as  indeed  opposed  to  a  single  income  tax,  as  being 
entirely  impracticable  and  for  that  matter  unjustifiable;     But 
he  upheld  his  scheme  of  an  income  tax  primarily  on  grounds 
of  social  reform.     The  bill,  he  tells  us,  "aims  to  secure  a  rec- 
ognition of  the  fact  that  the  '  ha'  cs  '  are  in  duty  bound  to  do 
much  for  the  '  have-nots ' ;  it  aims  at  a  greater  recognition  on 
the  part  of  the  latter  that  the  former  are  ready  to  make  sacri- 
fices  for  them.     It  is  the  function  of  our  modern  legislation 
to  recognize  the  hardships  of  life,  and  to  alleviate  them." » 
Camphausen,  however,  appealed  to  deaf  ears.     There  proved 
to  be  no  such  readiness  on   the  part  of  the  wealthy  to  make 
sacrifices  for  the  poor,  and  the  very  mention  of  self-assessment 
was  sufficient  to  kill  the  bill.     Nothing  was  accomplished  ex- 
cept that  in  1848  the  state  now  abandoned  one-third  of  the 
grist  tax  to  the  towns,  in  order  to  lighten  the  burden  resting 
on  the  working  classes. 

In  1 849  the  government  returned  to  the  fray  with  a  slightly 
altered  scheme.  The  tax  was  now  to  begin  only  at  1000 
thalers.  The  distinction  between  funded  and  unfundc!  incomes 
was  dropped,  and  the  question  of  self-assessment  was  relegated 
to  tne  pleasure  of  the  taxpayer.  Nearly  every  one  agreed 
in  the  discussion  that  something  must  be  done  to  make  the 
wealthier  classes  pay  their  proper  share,  but  no  effective 
majority  could  be  secured  for  any  particular  method  of  ac- 
complishing this  result.  Perhaps  the  best  speech  was  made 
by  an  old  tax  official,  Kuhne,  who,  in  referring  to  the  necessity 
of  abandoning  the  old  taxes,  conceded  that  this  would  involve 
"a  painful  operation  on  the  body  politic."  But,  he  added: 
"  When  one  finally  concludes  to  undergo  an  operation  and 

>  Quoted  in  Held,  op.  cil.,  p.  286. 


-AfiSSS^"'^ 


^^^^^!^^^^ 


ss^ss 


The  Income   Tax  in  Germany 


239 


then  demands  that  it  be  made  by  a  dull  knife,  I  can  only  call 
him  a  f(M)l.  Wc  all  confess  that  we  want  an  income  tax,  but 
we  are  not  willin}^  to  grant  the  means  whereby  it  can  become 
an  income  tax.  We  are  ready  to  have  people  pay  according 
lO  their  income,  but  we  refuse  to  let  any  one  ascertain  what 
the  income  is."  ' 

Nothinjj  came  of  this  second  project.  But  the  need  of 
more  revenue  had  now  become  so  imperious  that  the  govern- 
ment resolved  to  take  what  it  could  get.  Consequently  in 
1851  it  introduced  a  third  bill,  which  endeavored  to  accomplish 
only  a  partial  realization  of  the  income-tax  idea,  and  which 
included  a  retention  of  the  grist  and  slaughter  t^xes.  This 
finally  went  through  both  houses,  and  became  law. 

The  act  of  1851  provided  for  a  so-called  "class- and  classified 
income  tax."  '■'  The  old  class  tax  was,  with  a  few  modifications, 
limited  to  taxpayers  with  an  income  up  to  1000  thalcrs,  and 
was  levied  throughout  the  state  except  in  the  83  largest  cities, 
which  in  lieu  of  this  were  to  be  subjected  to  the  old  grist  and 
slaughter  tax.  On  the  other  hand,  the  new  classified  income 
tax  was  payable  by  all  individuals  having  an  income  of  1000 
thalcrs,  whether  they  lived  in  town  or  country.  The  class 
tax  was  divided  into  three  main  and  twelve  subclasses ; 
the  classified  income  tax  was  divided  into  thirty  classes, 
with  fi.xed  monthly  payments  varying  from  2.]  ti)  600 
thalers,  />.,  30  to  7200  thalcrs  annually.  This  was,  how- 
ever, subject  to  the  provision  that  the  annual  tax  should 
never  exceed  three  per  cent  of  the  income  in  each  class. 
Accordingly,  the  highest  income  taxable  was  240,000  thalers. 
Incomes  above  this  amount  were  entirely  exempt,  and  even 
the  wealthier  individuals,  nominally  subject  to  the  tax,  could 
escape  their  modest  contribution  by  remaining  in  a  large 
city  for  one  day  more  than  a  half  year.  Moreover,  as  the 
limitation  of  three  per  cent  ai'plied  only  to  the  minimum 
income  in  each  class,  the  higher  incomes  in  each  class  paid 
considerably   less  than  three  per  cent.      The   characteristic 

'  Quoted  in  Uelif,  op.  at.,  p.  2q2. 

'^  Die  KlaiStn-  mui  klaaifiderte  J.inkiimmem/eue: . 


240 


T/ie  Income  Tax 


i.  ■ 


part  of  the  system,  however,  consisted  in  the  fact  that  while 
the  incomes  were  to  be  assessed  by  officials,  these  were  strictly 
forbidden  to  make  any  "vexatious  inquiry  into  the  income  or 
property  conditions  of  the  taxpayer." ' 

Thus  a  step  in  advance,  although  a  very  small  one,  was 
taken,  and  with  this  the  tax  reformers  had  to  be  content 
for  two  decades.  With  every  year,  however,  not  only  the  ad- 
ministrative shortcomings,  but  the  essential  inequalities,  of  the 
tax,  were  more  and  more  realized,  and  the  growing  prosperity 
of  the  kingdom  brought  into  continually  stronger  relief  the 
virtual  exemption  of  the  wealthier  taxpayers.  The  success- 
ful experience  of  the  English  income  tax,  which  had  already 
been  touched  upon  in  the  fifties,  especially  by  Kries,^  was 
made  known  to  the  German  public  toward  the  close  of  the 
sixties  in  a  comprehensive  work  by  Vocke,''  and  the  scientific 
writers  now  began  a  discussion  of  the  problem  from  the 
newer  standpoint  of  social  reform.  Professor  Nasse  in  1861, 
like  Hoffmann  in  1840,  had  indeed  declared  himself  as  on 
the  whole  favorable  to  the  retention  of  the  tax  on  product, 
side  by  side  with  a  developed  income  tax.*  But  he  was  al- 
most the  last  of  the  important  publicists  to  take  this  attitude. 
Not  only  did  secondary  writers  like  Emminghaus,  Rossler, 
Walcker,  Eisenhart,  and  Maurus,*^  in  the  sixties  show  them- 
selves in  favor  of  t  3  income  tax,  but  prominent  men  like 

'"Jedes  listige  Eindringen  in  die  Vemi6gen-und  Einkommen-VerhaltniMe 
des  einzelncn  Steuerpflichtigen." 

»  See  Krius,  "  Orund/age  und  Ergebnisse  der  Englischen  Einkommensteuer," 
in  Zeitschrift  fur  u'te  Gtsammtt  Staatswissenscha/f,  vol.  x  (1854').  Kries  followed 
thiii  by  two  studies  of  the  Prussian  system.  "  Ergebnisse  der  Treussischen  Ein- 
kommensteuer," /«</.,  vol.  xi  (1855);  and  "Die  Preussischc  Einkommensteuer 
und  die  Mahl-  und  Schlachtsteuer,"  i/nJ.,  vol.  xii  (1856). 

»  Cfschuh.e  Jer  Steuern  iffs  /irilischen  Ktic/is.  Ein  Finan\s;tuhichtncher 
Vtrsiifk.     Von  \V.  Vocke.     Leipzig,  1S66.     See  esp.  pp.  505-590. 

♦  \V.  N«5se,  Hemtrkungen  iiher  das  Preus'.ische  SttutnyUem.     Honn,  1861. 

'' K.  H.  .\.  Emminghaus,  Uebtr  die  Sliutrfrage.  Bremen,  1S62;  C.  R6s.sler, 
Pie  Ctsuhhpunhte  der  Steueipolnik.  lierlin,  ..SOS;  K.  Walcker,  Die  Sel/ntvermill- 
uttgdes  Steiiirivesens.  Bjrlin,  1869;  H.  Eisenhart,  /)/,■  K'unst  der  Hesfeuerung. 
lierlin,  i,S6S;  Maurus,  Die  Moderne  BesteueruHg  und  die  btiteuerungir.form. 
Heidelberg,  1S70. 


The  Income  Tax  in  Germany 


241 


Stein  affirmed  that  "the  taxation  of  income  in  whatever  form 
it  may  appear  is  the  fiscal  field  of  our  present  and  fuiure; 
just  as  surely  as  it  was  impossible  in  former  centuries,  so 
surely  will  it  more  and  more  become  the  chief  tax  of  the 
future."  '  Above  all,  at  the  beginning  of  the  seventies,  men 
of  the  first  rank,  like  Held,  Knapp,  and  Conrad,  now  took  the 
matter  up  vigorously .^ 

The  happy  termination  of  the  war  with  France,  with  its 
immense  indemnity,  had  removed  all  concern  of  a  purely 
fiscal  nature  not  only  from  the  new  empire,  but  from  the 
separate  states,  and  the  way  was  now  clear  for  a  discussion 
of  tax  reform  from  the  point  of  view  of  equality  and 
social  justice.  In  this  movement  the  young  and  brilliant 
Professor  Adolf  Held  took  a  leading  part,  and  his  book  on 
the  income  tax,  published  in  1872,  was  a  thoroughgoing 
study  of  the  fundamental  principles  of  taxation,  from  the 
new  standpoint,  w  special  reference  to  the  German 
conditions.*  Held  aissected  the  existing  situation  with  a 
merciless  knife,  and  showed  co  lusively  that  there  was 
imperative  need  not  only  for  the  abandonment  of  the  Prussian 
grist  and  slaughter  tax  in  the  towns,  but  also  for  the  repeal 
of  the  taxes  on  product,  and  the  substitution  of  a  general 
income  tax  in  place  of  the  class  tax.  This  income  tax, 
together  with  carefully  chosen  indirect  taxes,  form  in  his 
opinion  the  model  revenue  system.  For  Held,  like  all 
modern  writers,  was  unalterably  opposed  to  a  single  income 
tax,  or  for  that  matter,  to  a  single  tax  of  any  kind.  A 
similar  programme  was  sketched  for  the  other  German  states, 
especially  Saxony  and    Bavaria.      His   conclusion   is   worth 


*  "  Die  EinkommensbcstoueruiiK,  miiRe  sie  nun  in  wclcher  Kurm  immer  auf- 
treten,  ist  das  Steuergebiet  unsercr  riegenwart  und  /ukunfl;  so  tjewiss  sic  in 
alien  ftiiheren  Jahrhunderten  ummrigliLh  war,  so  gcwiss  wird  sic  mehr  und  niehr 
die  Hiiuptsteuer  der  /ukunft  werden.'"  —  Lfhrhuch  der  Finam-visstnschaft. 
Von  I,,  von  Stein.     Leipzig,  1861,  p.  30V 

'•'See  an  article  by  J.  Conrad,  in  WWVhtt^nA'fi  Jahrhucher,  1871,  p.  6;  and 
the  tiook  of  1'.  Knapp,  /'.rlrai^ssteHer  odtr  /■  inkommenslfnfr.     I.eip/iR,  1872. 

'  Die  I  inkomiiteniltiicr.  Hn<ni:-u'hseiiu/i,illli,'ie  S/m/ifit  zur  Ktform  Uer  di- 
recttn  Staurn  in  DeuHihland.    Von  Dr.  Adolf  Held.    Bonn,  1872. 


^ 


242 


The  Income  Tax 


giving.  "  In  this  development  and  shape  we  consider  the 
income  tax  to  be  the  relatively  best  direct  tax.  Even  though 
Thiers  has  recently  called  the  income  tax  the  socialism  of  taxa- 
tion,—  a  dangerously  concealed  socialism,  —  we  are  not  dis- 
turbed by  the  objections  of  this  old  protectionist  and  bourgeois 
economist ;  for  there  is  a  kind  of  socialism,  i.e.,  the  emphasis 
on  the  social  and  political  duties  of  the  upper  and  wealthier 
classes,  which  is  decidedly  necessary  if  we  desire  to  avoid 
the  really  dangerous  socialism,  that  of  the  Paris  Commune."  * 
The  newly  formed  Association  for  Social  Politics  (  Verein 
fiir  Sozialpolitik)  also  took  up  the  matter  and  published  in 
1873  a  series  of  expert  opinions  on  the  subject.^  Professor 
Birnbaum,  of  the  university  of  Leipzig,  followed  with  an 
interesting  work  on  the  applicability  of  the  income  tax, 
especially  to  Saxon  conditions.*  In  this  he  made  a  thorough 
study  of  the  English  methods,  and  of  the  income  tax,  which 
had  for  some  time  been  in  existence  in  the  free  states  of 
Hamburg  and  Bremen.  Birnbaum  concluded  that  the  tax 
on  product  must  give  way  to  the  income  tax.  A  study  even 
more  favorable  to  the  direct  income  tax  in  contrast  to 
what  he  called  the  semi-produce  tax  system  of  the  English 
income  tax  {ertrngstetierdhnliche  Einkommensteiier)  was  made 
by  Dr.  Glattstern.*  Finally,  Professor  Neumann,  of  Freiburg, 
wrote  two  masterly  works  on  the  income  tax,  one  of  which 
dealt  especially  with  the  situation  in  Baden,  where  conflitions 
were  not  quite  so  favorable  as  in  Prussia  to  a  conversion  of 
the  taxes  on  product  into  an  income  tax."* 

'  Held,  op.  (it.,  p.  329. 

*  Die  Personalhesteuerung.  Schriften  ties  Vereim  fur  Sozialpolitik. 
Gutachten  von  K.  Nasse,  A.  Held,  J.  (Jcnstd,  von  Wintz-ingerode,  und  t'.  Kosslur. 
I.eip/ig,  1S73.  An  independent  work  was  that  of  WeyKold,  /.ur  Stiuerreformfrai^e 
in  Prfusicn  mil  heionJerer  KUcksicht  auf  liie  Ausfuhrluiikeit  eiiier  allgtmeinen 
Einiommensleuer,  Leipzig,  1872. 

"  i'fhcr  Jif  AnwtnJlHirkeii  Jer  Einkommemteufr  uiul  .^teuerreforinen 
iiherhaupt.     Von  Dr.  K.  Hirnbaum.     I.eip/JK,  1873. 

*  Pie  Sletier  •.oin  Einkommiii.  Eine  finiinziviisenst/icifUidie  .S/n,/if.  Von  Dr. 
S.  (d.ittstern.      I.tipzig,  1S76. 

'  Ir.  I.  Neumann,  /hf  lV(igres\iTt  Einki'mmenslfUtr  iiii  ^liuit"  iiuil  l^eiiieiiul,  • 
//'•Ms/iii//,     Leipzii:.  !'j74:  and  the  same  author's  A'/ri?^'?'--."!''-'?  ■'■/!;>■  Pfsoiiliilif 


ii 


The  Income  Tax  in  Germany 


243 


§  4.    The  Reforms  in  the  Seventies  and  Eighties 

As  usual,  however,  the  statesmen  lagged  behind  scien- 
tific opinion.  The  efforts  of  Von  dcr  Heydt  in  1869  and  of 
Camphausen  in  1871  to  reform  the  Prussian  system,  met  with 
failure;  but  in  1873,  after  a  very  lively  discussion,  a  decided 
step  in  advance  was  taken.  The  gri.st  and  slaughter 
tax  was  abolished  as  a  state  imjjust,  and  the  class  tax 
was  now  applied  to  the  towns  as  well  as  the  country. 
The  class  tax,  although  still  so  called,  really  became  an 
income  tax,'  because  of  the  provision  in  the  new  law 
that  the  tax  was  to  be  levied  "  on  the  basis  of  the  assessed 
value  of  the  annual  income."  "^  As  a  matter  of  fact,  however, 
this  practice  had  been  followed  since  1867.  For  at  that  date 
instructions  had  been  issued  to  take  the  "  presumed  income  " 
as  "not  indeed  the  only  factor  in  the  assessment,  but  never- 
theless the  principal  one."  The  line  of  division  between 
the  class-  and  the  classified-income  tax  in  the  law  of  1873 
remained  as  before,  at  1000  thalers  —  or  now,  according  to  the 
new  German  monetary  unit,  3000  marks  (S750);  but  a  com- 
plete exemption  was  introduced  for  the  so-called  mini- 
mum of  subsistence,  which  was  fixed  at  420  marks.  With 
this  exception  the  old  twelve  classes  were  still  retained,  with 
taxes  varying  from  three  to  seventy-two  marks,  so  that  the 
rate  in  the  lowest  income  in  each  class  ranged  from  five- 
sevenths  of  one  per  cent  to  two  and  two-thirds  per  cent,  thus 
providing  for  a  system  of  degressive  taxation. 

The  income  tax  was  still  so  calculated  that  the  rate 
rose  to  three  per  cent  on  the  smallest  income  in  each 
grade,  and  the  intervals  were  reduced,  thus  increasing  the 
number  of  grades.     The  upper  limit,  moreover,  was  entirely 

Steuern    voiii    Einkommen    und    l'frm\'%en  '       Eiii     IVoit    ziir    Stiiifrrf/ioni. 
Freiburg  i.  Hr.,  1876. 

'  Law  of  M.^y  25,  1873.  The  law  itself  will  Ik-  found  in  Hirth's  Anm^Un  i/rs 
Deutschtn  Rdchs,  1874,  as  well  as  in  the  '/.eiliJinfl  da  friiis^iichfn  Sljltitisiheii 
Bureaus,  vol.  xv  (1875).  'A  *^'  ""-"'''.  "  "'e  "euen  Preussischen  Steucrfjeset/e," 
in  C^^n.x^A\  Jahrbuiher  fiir  XiUtonal-Otkoiutmie  uml  Sliitistik,  vol.  xx  ("1873), 
pp.  360  ((  ly,^,  '  See.  7, 


1  4 


244 


The  Income  Tax 


I 


abolished.  Incomes  were  arranged  in  forty  grades,  up  to 
78o,cx»  marks;  beyond  this  point  the  tax  increased  1800 
marks  for  every  60,000  marks  additional  income.  Moreover, 
the  two  lower  classes  —  i.e.,  incomes  up  to  4200  marks  -  - 
were  abolished,  and  the  next  two  lower  classes  were  now  to 
enjoy  the  old  system  of  abater  cnts  and  exemptions,  which 
h,ad  hitherto  been  applied  only  to  the  class  tax.' 

In  the  main,  however,  the  old  system  of  official  assessment, 
with  its  injunctions  against  any  "more  searching  inquiry" 
{tiefercs  Eimiringcn)  or  inquisitorial  procedure  continued,  so 
that  the  tax  was  only  slightly  more  effective  than  before. 
The  exemption  of  the  minimum  of  subsistf.iice  was  indeed  a 
welcome  boon,  and  the  removal  of  the  maximum  Umit  brought 
the  wealthier  within  the  mc  hes  of  the  law.  In  1873,  for 
instance,  out  of  9,300,000  taxpayers,  5,000,000  paid  the  lowest, 
or  half-thaler,  tax;  in  1874,  after  the  new  law  went  into 
effect,  6,400,000  persons  were  exempted.'*  But  the  com- 
bination still  remained  one  of  disparate  taxes,  with  a  more 
rigorous  assessment  in  the  class  tax  than  in  the  income 
tax,  and  with  such  great  frauds  in  the  latter  that,  ac- 
cording to  the  calculations  of  some  writers,  from  one- 
half  to  two-thirds  of  the  real  income  was  not  reached  at  all. 
So  unsatisfactory,  in  fact,  was  the  combination — which  had 
been  predicted  by  Held  in  187^,  when  he  .said  that  "easy- 
going methods  of  assessment  will  not  be  cured  by  any  such 
half  reforms"^  —  that  even  Wagner,  the  great  admirer  of 
everything  Prussian,  later  on  declared  that  during  this  period, 
which  was  so  favorable  to  tax  reform,  "  unfortunately  nothing 
of  any  great  consequence  was  attained."  ^  Things  remained 
in  very  much  the  same  state  as  before,  and  the  only  important 
alterations  that  were  effected  during  the  next  two  decades 
were  the  law  of  1881,  which  reduced  the  rates  in  the  class  tax 

>  Cf.  sufra,  pp.  228,  239. 

'  See  '/.titichrift  dts  Priussischtn  Statistiscktn  Bureaus,  vol.  xv  (1S75). 

*  "Die  fiemUthlichkeit  der  SchStzung  winl  in  allgemeinen  durch  solche  halbe 
Reformcn  iiicht  »ufh3ren." —  Held,  efi.  at.,  pp.  299-300. 

'  "  I.cidcr  nichU  sehr  Kriiebliches  geleistet  worjen."  Wagntr,  Finant- 
U'iiitnuhaft,  op.  cit.,  1S99,  p.  27. 


The  Income  Tax  in  Germany 


245 


as  well  as  in  the  five  lowest  grades  of  the  income  tax  by  one- 
quarter,  and  the  law  of  1883,  which  abolished  the  two  lowest 
grades  of  the  class  tax  (thus  bringing  the  total  exemption  up 
to  9CX)  marks),  and  which  slightly  reduced  the  rate,  not  only  in 
the  class  tax,  but  in  the  two  lowest  grades  of  the  classified 
income  tax. 

The  movement,  however,  which  on  the  whole  made  such 
slight  progress  in  Prussia,  was  more  successful  elsewhere. 
The  income  tax  was  seriously  discussed  in  the  early  seventies 
in  Baden,  and  a  bill  embodying  that  principle  actually  passed 
the  lower  house  in  1874.  Neither  there,  however,  nor  in 
VViirtemberg  or  Bavaria,  which  had  worked  out  an  entirely 
developed  system  of  taxes  on  product,  were  there  any  imme- 
diate results  of  consequence.  The  so-called  Bavarian  income 
tax  imposed  in  1856  was,  we  remember,  nothing  but  a  tax  on 
wages  and  salaries.'  In  a  few  of  the  minor  states,  indeed, 
the  income  tax  had  actually  been  introduced  during  the  sixties, 
as  in  Oldenburg  in  1864  and  Hesse  in  1867,  as  well  as  in 
the  free  cities  of  Hamburg  in  1866  and  Liibcck  in  1869.  In 
only  one  of  the  important  states,  however,  was  a  real  step  in 
advance  taken  during  the  seventies.  This  was  the  kingdom 
of  SaxDiiy. 

The  old  Sa.xon  law  of  1834,  imposing  a  personal  tax,^  had 
been  amended  several  times  —  as  in  1845,  1850,  and  1858. 
But  this  was,  we  remember,  in  reality  nothing  but  a  part  of  a 
conglomerate  system  of  taxes  on  product,  as  in  the  other 
states.''  Beginning  at  the  close  of  the  sixties,  the  discussion 
became  more  active,  and  in  1871  the  Saxon  government  in- 
troduced a  project  for  a  unification  of  the  taxes  on  product. 
This,  however,  did  not  satisfy  the  growing  public  sentiment, 
and  finally  in  1874  the  legislature  enacted  an  income  tax, 
to   go   into   force    in    1878.*     The    law  of  1874,  as   slightly 


1  Cf.  supra,  page  237.  *  Cf.  supra,  page  233. 

'  Cf.  especially  Krt'ts^hmer,  /);>  Jirerini  StfUfrn  in  S,ic/isfii,  185S,  and  A. 
Judeich,  Dit  K^nfemtfiifr  tm  Konigreidtr  Sachiex.     Dresilen,  n.  li.     ['•'<57] 

*  Tht?  tPKt  <^'"  'ho  I^'-v  may  br  foiuid  in  tho  vulnmr  entitlcil  KViuisrli,-hf  Sdch' 
sische  Situergesetze,  1S80,  republished  every  few  years.    Kxr  an  account  nf  the  du- 


ii 


i 


,  Mi 


-  Y  I 


■K  I 


246 


T/ie  Income   Tax 


amended  in  1878,  provided  for  an  income  tax  as  a  supple- 
ment to  the  existing  land  and  business  taxes.  Almost 
from  the  beginning,  however,  a  more  important  place  was 
assigned  to  the  income  tax,  so  that  before  long  it  became  the 
principal  source  of  revenue,  and  the  other  taxes  became  sup- 
plementary. In  1878,  for  instance,  it  was  provided  that  any 
additional  revenu-.:  that  might  be  needed,  over  and  above  that 
secured  by  the  nominal  rate  of  the  existing  direct  taxes, 
should  come  from  the  income  tax;  and  in  1886  the  important 
step  was  taken  of  relegating  half  of  the  land  tax  to  the  local- 
ities.' The  consequence  was  that  by  1888  the  income  tax 
yielded  17,917,000  marks  out  of  a  total  of  20,860,000  derived 
from  all  direct  taxes. 

Among  the  important  features  of  the  Saxon  law,  were  the 
liability  to  taxation  of  corporations  as  well  as  of  individuals, 
and  the  fact  that  the  tax  applied  to  individuals  instead  of 
households,  the  wife  and  the  children  being  separately  as- 
sessed. The  taxpayers  were  divided  into  a  large  number 
of  classes,  beginning  at  300  marks  (below  which  figure 
incomes  were  totally  exempt),  and  were  liable  to  a  fixed  tax 
in  each  clas.s.  Beginning  with  a  tax  of  one-half  mark  for 
the  lowest  classes  (300  400  mark.s),  or  0.143  per  cent  of 
the  minimum  income,  the  rate  rose  to  three  per  cent  when 
the  income  attained  5400  marks.  These  were,  however,  to 
be  only  the  normal  rates,  which  could  be  raised  or  lowered 
annually  by  adding  or  subtracting  a  certain  percentage,  as  in 
England. 

The  administrative  features,  however,  were  the  most  signifi- 
cant part  of  the  Saxon  law.  For  the  first  time  in  any  im- 
portant German  state,  the  principle  of  obligatory  self-valua- 
tion was  introduced,  although  indeed  revised  and  controlled 

cussion  see  the  articles  of  Gensel  in  Mirth's  Annalen  Jts  deutsihen  Keichs,  vols,  vii 
ami  viii  (1874,  1.S75).  The  statistics  from  1875  to  1894  may  be  found  in  an 
article  by  Bohmert  in  the  Zeituhrift  Jts  Sa</isisc/ien  Statistischen  Burtaus  for 
1894. 

'  (f.  the  article  entitlfcl  "  Die  I'ebcrweisung  <ler  halben  Grundsteuer  an  die 
fichulgemeinden  im  KiiniLjreiche  Sachsen,"  liniinzArthiv,  vol.iv  (1 887),  pp.  1 1 23 
et  itij. 


The  Income   Tax  in   Germany 


24; 


by  an  assessment  of  officials  with  adequate  powers. '  All 
employers  were  required  to  hand  in  a  list  of  the  salaries  paid 
to  their  employees  and  oiflcials,  and  penalties  for  fraud  rose 
as  hifjh  as  ten  times  the  amount  of  the  tax.  These  more 
adequate  administrative  methods  at  first  aroused  much  com- 
plaint ;  but  the  tax  proved  to  be  so  valuable  a  fiscal  engine, 
and  the  administration  was  gradually  so  greatly  improved,  that 
the  complaints  diminished  in  both  volume  and  frequency. 
Competent  investigators  showed  that  there  was  a  progressive 
movement,  and  one  unbiased  writer  tells  us  that  "whereas 
at  the  beginning  the  law  seemed  to  work  in  a  demoralizing 
fashion,  it  gradually,  after  a  longer  application,  came,  on  the 
contrary,  to  exert  an  ethical  and  educational  influence.'"- 
Thus,  while  all  the  difficulties  of  administration  were  by  no 
means  done  away  with,  the  experience  of  the  Saxon  income 
tax  law  pointed  out  the  path  of  reform  to  the  other  German 
states. 

The  Saxon  experiment,  joined  to  the  growing  dissatis- 
faction with  existing  methods,  as  well  as  the  more  thorough 
treatment  of  the  subject  by  scientific  writers,  could  not  fail 
to  produce  its  results  elsewhere.  The  decade  from  1880  to 
1890  witnessed  a  phenomenal  activity  on  the  part  of  the 
scientific  writers.  It  was  during  this  period  that  there  ap- 
peared the  elaborate  treatises  by  Schaffle,  Wagner,  Meyer, 
Roscher,  Vocke,  Neumann,  and  Cohn,^  ab  well  as  numberless 

'  The  improvement  effected  hv  the  law  in  indiuin);  the  landowners  and  farmers 
to  kcepi  better  accounts  is  adverted  ti>  in  Wit  luit  siJi  ,itr  l.,iii,kvirt  ztir  fro- 
gressiven  I'.inkommensteuer  zu  verhaltfn.  Von  I)r.  Her-  ..im  Howard  (jirofessor 
of  agricultural  accounting  at  the  University  of  I-eip/ii,-"!.      '  ••ip/i^'.  1SS9. 

^  "  Wahrcnd  anfangs  das  (leset/  denioralisirend  /\i  wirUen  schicn  ul)t  es  bei 
langerer  practischen  Ilandhabung  ini  ('.efjtntlu-il  oinon  sitllich  er/iehcrischen 
Einfluss."    Von  liosse,  Die  Grmcinilebesteufrum: in  Sit,hu-ii.    I.eip/ig,  KS90,  p.  42. 

'  .\dolph  Wagner,  Finam-a'iiSi-nuliiift.  I.eip/ig,  vol.  i,  jded.,  iSSj:  vol.ii, 
1880;  A.  G.  V.  Schaffle,  Pif  Gruntluitze  dtr  Stfuerp.'litik  iitiJ  di,-  s,hii-(htti.ifn 
Unamfrngen  DeutschlanJs  unU  Ofslfrreiihs.  riilungen,  18.S0;  K.  Meyer, 
Dit  Principien  dtr  ^frtihten  litsteuerung.  Kerlin,  18X4;  \V.  Koscher,  Ssstfm 
der  Finanzn'isseitsckafl.  Stuttgart,  I8.S6;  Y.  J.  Neumann,  /)/<■  Sleu,r  unJ  ,t,is 
■-•ffftit'-the  j'mrrtiic.  Lcip^iij,  iSS^,  G.  Cuhil,  Sy.'.cn:  ti'rr  h'ir.au-.-.iissa:;,-':.:;';. 
Stuttgart,  1889. 


;     4 
;    t  ! 

ii) 


248 


The  Income  Tax 


smaller  contributions,  among  which  are  especially  to  be  sig- 
nalized the  monographs  of  Gneist  and  Frantz.'  All  of  these 
laid  a  deep  and  firm  foundation  for  the  income  tax,  as  against 
the  old  system  of  taxes  on  product.  Some  less  balanced 
writers  reverted  to  the  old  idea  of  a  single  tax  on  property, 
but  made  no   headway  against  the  income-tax  movement.' 

As  a  consequence  of  this  movement  Baden  was  the  next 
important  state  to  take  up  the  matter.  It  has  been  explained  ^ 
how  Baden,  in  1848,  sought  to  round  out  her  system  of  taxes 
on  product  by  a  tax  on  capital.  This  tax  was  subjected 
to  various  minor  changes  in  1850  and  i860.  As  a  result  of 
the  discussion  after  the  Franco-Prussian  War,  however,  an 
income  tax  scheme  was  introduced  and,  as  mentioned  above, 
even  passed  the  lower  house,*  but  failed  to  become  law. 
In  lieu  of  this,  the  old  capital  tax  was  converted  into  a 
tax  on  the  income  of  capital  {Kapitalrcntcnsteiter)  in  1874, 
the  tax  now  being  measured  by  the  actual  yield  instead 
of  by  the  par  value  of  the  securities  and  the  yield  being 
capitalized  at  the  rate  of  five  per  cent.  This  was  followed  by 
a  law  of  1876,  which  combined  the  old  class  tax  and  the  busi- 
ness tax  into  a  new  impost,  known  as  the  tax  on  earnings  or 
on  acquisitions  {Enverhsteuer).  This  tax  endeavored  to 
reach  the  presumed  business  profits  a  little  more  directly, 
and  with  less  reliance  on  the  system  of  external  signs  or 
indicia  than  the  ordinary  business  tax  ;  but  it  also  was  not 
very  successful  Consequently,  after  a  long  and  interesting 
discussion,*  the  final  step  was  taken  in  1884  by  the  enactment 
of  an  income  tax. 

The  Baden  income  tax  law  of  1884,^  like  that  of  Saxony  of 

*  R.  Gne'itt,  Die  prtussisrif  FinaHirtform.  Berlin,  1881;  Constantin  Frantz, 
Die  sotirt/e  Steuerreform  ah  die  Conditio  sine  i/Ma  non  wenn  tier  soiialen  Revolution 
vorgeheugl  tutiilen  ioll.     Mainz,  1881.  , 

■^  Cf.  J.  ( I.  Kellermann,  Pas  BesitiUeutr system,  die  kunftige,  eimige,  direkte 
SteuerquelU  alter  KecHtssta('  ■<,    1889. 

»  Supra,  page  236.  *  Su/Ta,  page  245. 

^  A  most  valuable  part  in  this  discussion  was  taken  by  Professor  N'eumann,  in 
vatious  works,  gome  of  which  have  been  nicntioncii  above,  page  242. 

•  Kor  the  text  uf  the  law  see  Philippovich,  p/>.  rit. 


The  Income  Tax  in  Germany 


249 


the  preceding;  decade,  applied  to  associations  and  corpora- 
tions as  well  as  to  individuals  ; '  but  unlike  that  of  Saxony  it 
provided  for  an  avoidance  of  double  taxation  by  making  cor- 
porations liable  only  on  their  incomes  over  three  per  cent, 
that  amount  of  income  being  presumed  to  be  reached  in  the 
hands  of  the  individual  security  holder.  The  tax  was  as- 
sessed on  the  individual  except  that  the  head  of  the  family 
was  liable  for  the  entire  family  income  whenever  he  had  the 
right  to  dispose  of  it.  Incomes  under  500  marks  were  ex- 
empt. In  order  to  retain  the  same  nominal  rate  of  taxation 
—  2\  per  cent— with  an  actual  degressive  tax  (a  lower  rate 
on  the  small  incomes),  a  complicated  system,  known  as  tax- 
able valuations  {Steiieranschldge)  was  introduced,  whereby 
various  grades  of  income  were  taken  up  in  the  tax  list  at 
different  figures;  e.g.,  500  marks  at  125,  2000  marks  at  750, 
and  so  on,  until  incomes  were  assessed  at  their  full  value 
when  they  reached  the  figure  of  30,000  marks.  The  ad- 
ministrative machinery  rested,  as  in  Saxony,  on  the  principle 
of  declaration  or  self-valuation,  combined  with  a  careful 
supervisory  official  assessment. 

The  old  taxes  on  product,  like  the  land  and  building  tax 
and  the  capital  tax,  were  retained,  but  'he  earnings  tax 
{Erwerbs teller)  of  1874  was  now  limited  to  profits  derived 
from  capital  actually  invested  in  business.  The  consequence 
was  that  although  the  income  tax  was  nominally  put  side  by 
side  with  the  old  produce  ta.xes,  in  practice  the  system  meant 
a  general  income  tax,  with  a  differentiation  between  funded 
and  unfunded  incomes.  For  incomes  in  general  were  now 
reached  by  the  income  tax,  while  additional  taxes  at  various 
rates  were  imposed  on  incomes  derived  from  property,  whether 
consisting  of  land,  of  business  capital,  or  of  securities. 

The  adoption  of  the  income  tax  in  Saxony  and  Baden  was 
followed  by  its  introduction  in  a  few  of  the  smaller  states, 
like  Saxe-Weimar  in  1883  and  Anhalt  in  1886.  The  general 
discussion  which  ensued  did  not  fail  to  affect  public  sentiment 
in  Prussia,  which  was  now  lagging  far  behind  some  of  her 

'  In  1892  corporations  ami  associations  were  exempted  from  the  tax. 


I  ti 


'  1 


'     i\ 


ill 


250 


The  Income  Tax 


sister  commonwealths.  The  Prussian  government  finally  took 
up  the  matter  with  great  energy,  and  in  the  early  nineties, 
under  the  ministry  of  Dr.  Miquel,  succeeded  in  enacting  a 
series  ot  laws  which  put  Prussia  as  far  in  the  lead  as  she  had 
hitherto  been  in  the  rear. 


V.   i 


■1.    i 


It! 

'n 


§  5.    The  Prussian  Income   Tax  of  i8gi 

The  great  Prussian  reforms  of  the  nineties  consisted  of  four 
parts :  the  reconstruction  of  the  business  tax,  the  introduction 
of  a  general  income  tax,  the  enactment  of  a  supplementary 
property  tax,  and  the  remodelling  of  local  taxation.' 

The  income  tax  law  of  1891  abolished  the  class  tax  but 
retained  the  dividing  line  of  yxo  marks  as  the  one  beyond 
which  the  taxpayers  were  required  to  declare  their  in- 
come. Several  other  features  of  the  class  tax,  primarily  of 
an  administrative  nature,  were  likewise  retained,  as  we  shall 
see.  The  income  tax  was  now  mide  a  general  tax.'  The 
chief  provisions  may  be  discussed  under  four  heads  :  first,  to 
whom  does  the  tax  apply.'  second,  what  is  taxable.'  third, 
what  are  the  rates  .>  and  fourth,  how  is  the  tax  assessed  and 
collected.'  As  the  law  of  1891  is,  with  a  few  modifications, 
still  in  force  we  shall  speak  of  its  provisions  in  the  present 
tense. 

The  law  applies  to  certain  specially  designated  associa- 
tions, including  ordinary  corporations,  as  well  as  to  individ- 
uals and  it  follows   the    Baden   principle  in  that  corporate 

'  Kor  a  general  account,  especially  of  the  last  two  phases  of  the  reform,  see 
Seligm.in,  /'w./rj  in  'luxation,  chap.  lo,  part  iv. 

•*  EtnkommanUuergcutz  v.  24  "Juni,  iSgi.  The  law  has  been  frequently  re- 
printed with  annotations.  A  good  commentary  is  that  of  Kolisch,  1&J3.  The 
best  and  fullest  work  is  the  Commentar  ziim  /■■iniommemleuergfsftz,hy  H.  Fuist- 
ing,  which  forms  ili--  lirst  volume  of  his  Oit  Prrussischen  Direkten  Sleutrn.  The 
7th  eilition  (I'jo;)  is  a  volume  of  993  pages  and  gives  the  text  of  the  law  of 
1891  togetlu-r  with  the  amendments  of  1906  followed  in  each  section  bv  explana- 
tions, judicial  decisions,  and  comments.  A  pocket  edition  is  also  published 
every  few  y.ars,  the  most  recent  being  that  of  1910.  An  Knglish  translation  of 
the  Isw  wi!!  !-e  ft,uiiJ  in  the  Hluc  liock  iiipoiti  tt^fieiiing  fSraduattd  /ncomt 
Taxes  in  I'oreign  States.    Misc.,  no.  2,  1905.    Cd.  2587. 


The  Income   Tax  in  Germany 


251 


:r>comes  are  faxed  only  on  the  excess  over  three  and  one-half 
per  cent.  All  Prussians  arc  subject  to  the  tax  except  those 
who,  without  having  any  domicile  at  home,  have  lived  abroad 
for  more  than  two  years,  as  well  as  those  who  are  exempt 
according  to  the  imperial  law  regulating  the  subject  of  double 
taxation,  to  which  referen.  e  will  1  ■  m.ide  later.  The  law  also 
applies  to  other  Germans  residu  4  in  Prussia  as  well  as  to 
foreigners  who  reside  in  Prussia  for  business  purposes  or,  if 
there  for  other  reasons,  who  are  resident  for  more  than  one 
year.  Finally,  the  law  ap[)lies  to  any  one  who  derives  an  in- 
come from  Prussian  rer !  estate,  industry,  or  trade  or  from 
Prussian  salaries  or  pens..,ns.  Members  of  the  royal  family 
and  of  the  former  royal  families  of  Hanover,  Kurhessen,  and 
Nassau  are  exempt. 

Coming  next  to  a  consideration  of  what  is  taxable,  income 
is  declared  to  consist  of  the  annual  net  receipts  from  the  f>)ur 
categories  of  capital,  real  estate,  trade  and  industry,  and 
lucrative  occupations.  Kxtraordinary  receipts  from  inheri- 
tance, gifts,  life-insurance  policies,  the  sale  of  real  estate  (if 
not  carried  on  as  a  business  or  for  purposes  of  speculation), 
and  similar  receipts  Uihiilichc  Ertoerbnngai)  are  not  regarded 
as  income,  but  are  treated  as  accessions  to  capital.  Detailed 
provisions  are  laid  down  as  to  what  deductions  are  to  be 
made  from  gross  receipts  in  order  to  arrive  at  the  net  receipts 
or  taxable  income.  Revenues  and  expen.ses  arc  divided  into 
fixed  and  uncertain  (ffststchcndc  utui  unbcstiiumti);  in  the 
former  case  the  income  for  the  year  is  taken,  in  the  latter  the 
average  for  the  last  three  years.  The  taxable  income  is  still 
the  family  income,  i.e.,  it  includes  the  income  ot  the  wife  (ex- 
cept when  she  lives  apart  from  her  husband),  and  of  the  chil- 
dren, unless  they  have  an  independent  income  which  is  not  at 
the  disposal  of  the  father. 

In  the  third  place,  considerable  changes  were  made  in  the 
classification  and  rates.  Incomes  below  900  marks  are,  as  be- 
fore, exempt,  but  they  are  then  arranged  in  different  stages, 
with  .a  fixed  tav  in  each  Inri^jne"!  from  900  to  1050  marks 
pay  6  marks  (0.66  to  0.57";^),  and  the  scale  rises  in  twcnty- 


i  t 


i  * 

?.  i 

I  I 

":  i 


252 


'f/te  Income  Tax 


six  clasACS  until  incomes  from  9500  to  10,500  marks  pay 
300  marks  (3.15  7«  to  2.85%,  or  3%  of  the  mean  inconc> 
Then  the  grades  rise  by  looo  marks  to  30,500  marks,  by 
1500  marks  to  32,000  m^rks,  and  by  2000  marks  to  100,000 
marks,  at  which  figure  the  normal  rate  of  four  per  cent  is 
applied.  Altogether  there  ar  now  seventy  five  grades, 
whereas  in  the  old  classified  income  tax  there  were  only 
twenty-seven.  Moreover,  the  normal  rate  of  the  higher  in- 
comes is  now  four  per  cent  as  against  the  old  t>'ree  per  cent.' 
The  rates  for  limited-liability  companies  were  made  slightly 
higher  in  the  lower  grades. 

The  system  of  abatements  was  now  also  extended.  The 
general  provisions  of  the  old  laws  of  185 1  and  1873  were 
retained,  permitting  abatements  for  children  and  for  special 
reasons  which  diminish  the  taxpayer's  ability  to  pay,  like  ill- 
ness, accident,  indebtedness,  and  extraordinary  outlays  for  the 
education  or  living  expenses  of  the  iamily.  But  in  the  case 
of  children  the  abatements  from  the  taxable  income  in  all 
cases  where  the  income  did  not  exceed  3000  marks  was  now 
definitely  fixed  at  fifty  marks  for  every  child  under  fourteen. 
In  case  this  should  not  result  in  an  actually  lower  tax,  it  is 
provided  that  if  there  are  three  or  more  children  the  tax- 
payer should  be  moved  down  one  grade.  Finally,  in  the  case 
of  the  special  reasons  mentioned  above,  diminishing  the 
ability  of  the  taxpayer,  the  permissible  abatement  now  con- 
sists of  a  reduction  of  three  grades  provided  the  income  does 
not  exceed  9500  marks.  This  was  a  substantial  enlargement 
of  the  system. 

Most  important,  however,  are  the  new  administrative 
provisions  regulating  the  assessment  and  collection  of  the 
tax.  In  the  first  place  the  local  officials  are  required  to 
make  a  careful  annual  list  of  all  persons  presumably  sub- 
ject to  the  law.  In  the  next  place  is  to  be  noted  the  intro- 
duction of  the  principle  of  compulsory  declaration  of  income 

'  For  a  complete  tabic  of  these  income-tax  rates,  see  Scligman,  J'rogressire 
Taxtifirn,  2!  e!.,  !->->H,  j-..  4S;  ar,.-!  Krnr,an,  In.-.-.tnf  Tr.xr.h.-.n,  MiKvaukee, 
1910,  p.  94. 


The  Income   Tax  in  Germany 


253 


gal 

!  r  /-t  U  * 

pro 

iiibi- 

I,  ir     '1 

.    '• 

11..       L 

■    10 -,1 

1 .  1       , ,  ! 

r. 

'1  !i' 

1    ■' 

.1- 

r  '.. 

\, , 

.1(  .s 

iher 

ne- 
and 

by  the  taxpayrr.  The  old  free  ami  easy  system  which,  as 
we  know,  had  by  express  legislation  and  administrative  pro- 
vision  sedulously  avoided  any  minute  inquiry  into  the  condi- 
tions of  the  individual's  position,  had  made  the  tax,  especially 
in  the  upper  grades,  very  much  of  a  farce.  As  a  high 
Prussian  official  himself  tells  us :  "  The  laws  in  the  German 
states  were  in  the  highest  degree  defectiv  Where,  as  in 
I'russia,  the  assessment  was  made  unci' 
tion  of  any  '  more  searching '  or  '  i 
the  income  or  property  conditions,  th  r 
real  income  was  entirely  out  of  the 
break-up  of  the  income  tax  was  t  l-  < 
tax  was  in  the  highest  degree  u'\  .  r\ 
Practically  no  one  was  correctl'  .s' 
ents  of  fixed  wages  or  salaries,  ai...  "  |  i 
of  intangible  property  were  scarcely  i  u  i.^ 
author,  who  wrote  just  before  the  refor  i 
ties,  vent  so  far  as  to  pronounce  the  inci. 
cheai  system,""  and  to  confirm  the  prediction  of  Kuhnc  in 
i8^i  on  the  floor  of  the  house,  that  the  tax  would  become 
a  /ery  caricature  of  an  income  tax.' 

It  v.-as  but  natural,  therefore,  that  the  question  of  compul- 
sory declaration  should  be  in  the  forefront  of  the  discussion. 
It  was,  in  fact,  the  point  around  which  most  of  the  objections 
to  t!.e  bill  crystallised.  The  way,  however,  had  been  pre- 
pared by  scientific  writer  who,  'iko  Neuniai.n,  had  stated 
that  "in  such  matters  nothing  can  lie  accomplished  by  kid 
gloves,"  *  and  by  special  works  devoted  to  this  single  topic, 
one  of  which,  by  Henrich,  appeared  at  the  close  of  the 
eighties,  and  ran  through  several  editions.*    The  controlling 

'  Dit  F.inkommi-n:'>tsleueruttj;der  /.ukiin/t  in  AnknupfH"^  an  i/,is  /Wussisti 
Einkommtmteu/i-Ce'ct-.     Von  I!.  I'ui-ling.     IWrlin.  1903,  [..  I. 

2"Ein  I.UR-  un.l  Tru^^-nysteni "  —  Pit  Refirm  Jer  Di.  ecten  Steuern,  ins- 
hesondtrt  dit  Einfkhruni;  Jer  Stlbitfinuhatzung  i»  Pretissen.  l:in  Mahnworl an 
die  J'rtHiStsc/itn  /MitdUigswuhler.     Vun  L.  Ilentich,  2(1  cd.,  Iterlin,  liiSg,  p.  58. 

'  IHd.,  p.  49. 

■♦  Neumann,  l)ie  P  <\^rcssive  FAnkommeitiieuer.     1874,  \t.  191. 

''  See  op.  iit,,  above. 


M  i 


? 


I  \ 


I-  i 

i 


^54 


TAf  Income  Tax 


consideration,  however,  was  the  virtual  breakdown  of  the 
old  system.  If  any  success  at  all  was  to  be  achieved  by  the 
new  law,  entirely  different  administrative  methods  were  uni- 
versally conceded  to  be  necessary.  These  new  methods  were 
sec  red  by  a  series  of  elaborate  provisions. 

Every  one  with  an  income  of  over  3000  marks  is  now 
compelled  to  hand  in,  within  two  weeks,  a  declaration  in 
writing  of  his  income,  classified  into  the  four  categories 
mentioned  above.  The  declaration  is  to  be  made  "to  the 
best  of  his  ability,"'  but  without  the  use  of  oaths.  In 
the  case  of  delay  the  taxpayer  loses  his  right  of  appeal 
and  is,  moreover,  subject  to  a  penalty  of  five  per  cent. 
In  case  of  further  delay  —  after  a  second  notice  —  an  ad- 
ditional penalty  of  twenty-five  per  cent  is  imposed.  Refusal 
to  make  a  return  entails  a  fine,  and  in  case  of  false  returns 
the  penalty  rises  to  ten  times  the  amount  of  the  tax.  The 
declaration  is  then  submitted  to  the  scrutiny  of  an  assess- 
ment commission  (  Veranlagitngskoinmission),  which  replaces 
the  valuation  commission  {Einsc/iixfziings-kominissioH)  oi  the 
old  law.  The  majority  of  the  assessment  commission  are 
elected,  while  the  minori:y  (including,  however,  the  chair- 
man) are  appointed  by  the  government.  The  commission 
is  directed  to  subject  the  taxpayer's  declaration  to  a  precise 
igcnancn)  and  careful  (sorgfa/tigcn)  examination.  In  case 
of  any  doubt  the  commission  may  summon  the  taxpayer 
and  other  witnesses  and  question  them.  If  still  dissatis- 
fied, it  may  proceed  to  make  its  own  assessment,  using  the 
taxpayer's  declaration,  if  any.  as  a  help.  Appeal  is  per- 
mitted to  a  special  commission  (Reriifiings-koiiihiissiou),  one 
of  which  exists  in  every  governmental  district  {Rifie- 
ritngsbezirk).  This  appeal  commission  is  composed  of 
members  partly  appointed  by  the  government,  partly  elected. 
A  .second  and  final  appeal  is  permitted  in  certain  cases,  to 
the  Supreme  Administrative  Court  (ObiTiiiivd/tiingsgrric/it). 
All  officiais  connected  with  the  law  are  pledged  to  secrecy, 
and  a  disclosure  of  any  detail  that  has  come  to  their  notice 

' "  Nach  bestem  Wissen  und  (Jcwisscn." 


The  .In- J. lie   Tax  in  Germany 


255 


is  punishable  with  fifteen  hundred  marks'  fine  and  three 
months'  imprisonment. 

In  the  case  of  the  smaller  taxpayers  —  those  up  to  3000 
marks  —  no  declaration  is  nominally  required,  and  an 
additional  administrative  body  known  as  the  "Preliminary 
Valuation  Commission"  (  VoriiHsclidizungs-kommission^  is  in- 
terposed. This  commission,  also  composed  partly  of  ap- 
pointed and  partly  of  elected  members,  is  presided  over  by 
the  village  head  or  appointed  official.  It  examine"  and 
amends  the  list  of  taxablcs  prepared  by  the  local  oflficials, 
and  transmits  it,  with  corrections,  to  the  head  of  the  ordinary 
assessment  commission  for  review  and  decision.  The  pro- 
cedure in  this  case  is  the  same  as  in  the  other.  The  new  meas- 
ure thus  represents  a  genuine  income  tax,  with  administrative 
machinery  that  must  be  characterized  as  entirely  adequate. 

In  the  discussion  of  the  income  tax  bill  the  propriety  of 
differentiating  the  tax  was  recognized  on  all  sides.  But  it 
was  not  thought  wise  to  attempt  this  through  a  direct  varia- 
tion of  the  rate.  In  the  government  project  it  was  proposed 
to  do  precisely  what  Gladstone  did  in  1853,  namely,  to  leave 
the  rate  of  the  income  tax  uniform,  and  to  supplement  it  by 
a  direct  inheritance  tax.  In  this  way  funded  income  would 
be  reached  twice,  once  by  the  income  tax,  and  again  by  the 
inheritance  tax.  This  project,  however,  failed  of  adoption. 
In  lieu  thereof  Dr.  Miquel  two  years  later  introduced  and 
secured  the  passage  of  a  bill  embodying  a  scheme  up  to  that 
time  entirely  unknown  in  Germany,  but  which  had  been  ap- 
plied the  year  before  by  Pierson,  in  Holland.'  This  consisted 
of  an  additional  direct  projierty  tax.  The  scheme  was  ap- 
proved by  the  legislature,  which  in  1893  passed  a  law  provid- 
ing for  a  property  tax,  under  the  name  of  the  supplementary 
tax,  at  the  rate  of  one-half  of  one  per  mill  on  all  property.* 


'  For  a  full  description  of  the  Dutch  scheme  see  Stlij;man,  Essays  in  Taxation. 
5th  cil.,  1905,  Y\\  .i2:-.5.;o. 

-  hri;;inzun^s-Sltni-ri;eselz  of  July  14.  lSi)J.  \  gooil  accoun;  of  this  will  he 
found  in  F.  I.istrow, "Dii' V'frniiivifii'i'ili'iur  und  ihre  Kinfut;untj  in  das  Preussische 
StcuersystiMii."     Conrad's  Jahibiuhcr,  Uritte  lolge,  vol.  57  (1892),  pp.  161-218. 


256 


The  Income  Tax 


lU 


Estimating  ordinary  interest  rates  at  five  per  cent,  a  tax 
of  one-half  mill  on  property  is  equivalent  to  a  tax  of  one 
per  cent  on  income.  The  practical  result,  therefore,  is  to 
tax  iritomcs  t^erived  from  property  one  per  cent  more  than 
incomes  derived  from  labor;  thus  securing  the  differentiation 
between  earned  and  unearned  incomes.  The  supplement- 
ary property  tax  is  applicable  only  to  individuals  and  not, 
like  the  income  tax,  to  corporations.  It  is  arranged  in  grades, 
so  that  the  one-half  per  mill  rate  applies  only  to  the  lowest 
figure  in  each  class.'  Exemption  is  accorded  to  all  prop- 
erty of  less  than  6000  marks;  to  all  persons  whose  income 
does  not  exceed  900  marks,  provided  their  property  does  not 
exceed  20,000  marks ;  and  to  women  wage  earners  and  minor 
orphans,  whose  income  does  not  exceed  1200  marks  and  whose 
property  does  not  exceed  20,000  nixrks.  The  administrative 
procedure  is  very  much  the  same  in  the  income  tax,  except 
that  no  declarations  are  required,  tiic  income  tax  returns  in 
general  sufficing  tor  the  purpose.  Although  the  rate  is 
fi.xed  at  one-half  a  mill,  the  tax  is  known  as  a  contingent  tax 
(Coiiti»gtntiningsstci(i-r),  i.c  one  where  the  expected  yield  is 
estimated  at  a  definite  figure,  and  where,  in  case  the  actual 
yield  exceeds  or  falls  short  of  tiie  estimate,  a  slight  change 
in  the  rate  is  permitted.  The  "contingent"  was  fixed  at 
thirty-five  million  marks,  but  the  actual  yield  in  1895-1896 
was  only  about  thirty-one  millions,  so  that  the  rate  was  raised 
to  5.2  |)er  mill. 

The  new  income  tax  proved  unexpectedly  successful.  The 
yield,  irrespective  oi  the  tax  on  corporations,  jumped  the  very 
first  year  from  seventy  nine  and   onc-li.ih    million  marks   to 


I'Koi  I  KT\ 


Tax 


'  1  bus  i<x«)  to  Sooo  marks  pav      5  marks 

lo.iixi  III   12.000    "  |.av     5 

2(),i.xM)  til   22/xx)    "  [lav  10       *• 

.(0,000  til  .(4,fx>T    "  |iav  20       " 

(x),ixx>  til  7<>,iX)ii     "  |iay  jo       " 

From  7o,(xxj  1.1  ioo.otxj  ni^rk'i  thi'  lax  imjr'as<".  5  iiiiiiU>i  (nr  cinli  lo.ixx). 
200,000  iiiiii'k>  lin-  lax  III,  HUMS  10  marks  lor  catli  20,000. 


Alnjve 


II 


The  Income   Tax  in  Germany 


257 


almost  one  hundred  and  fifteen  millions.  This  fact,  coupled 
with  the  additional  revenue  from  the  new  property  tax  and 
with  the  great  -ind  growing  surplus  of  the  state  railway  system, 
made  possible  the  final  reform  of  the  finances. 

The  income  tax  of  1891  was  designed,  in  the  first  instance, 
to  round  out  the  existing  taxes  on  product,  that  is,  the  land 
tax,  the  buildings  tax,  and  the  business  tax,  as  well  as  the 
old  tax  on  mines.  The  business  tax,  moreover,  had  been 
reformed  in  the  same  year,  1891,'  and  use  was  made  of  the 
new  income  tax  returns  to  check  up  the  estimated  business 
profits.  It  could  not  be  denied,  however,  that  this  combina- 
tion of  produce  and  of  inuime  taxes  was  illogical,  and  that 
it  resulted  in  different  kinds  of  double  taxation.  Miquel,  in 
the  discussion  of  iSqi,  had  already  expressed  the  hope  that 
it  might  be  possible  for  the  general  state  government  to 
secure  enough  revenues  from  other  sources  to  enable  it  to  do 
away  with  the  entire  system  of  taxes  on  product  or,  at  all 
events,  to  relegate  them  to  the  local  divisions.  In  1893,  after 
the  unexpectedly  great  yield  of  the  income  tax.  the  realization 
of  this  hope  became  possible  and,  as  a  consequence,  all  the 
existing  taxes  on  produce  were  discontinued  as  state  taxes. 
At  the  same  time  the  entire  .system  of  local  revenues  was 
reformed.      Both  laws-  were  to  go  into  effect  in   1895. 

The  local  finance  law  contained  an  important  feature  affect- 
ing the  income  tax,  which  needs  special  mention.  The 
local  revenues,  so  far  as  direct  taxes  are  concerned,  were 
henceforth  to  be  raised  from  the  throe  chief  taxes  on  prod- 
uct—  lanti,  buildings,  and  Inisinoss  taxes  —  together  with 
Siipploments  to  the  state  iiuoinc  ta\.  The  throe  produce 
taxes,  altliough  no  longer  utili/od  for  state  purposes,  were 
still  to  be  assessed  by  state  officials,  and  it  was  directed  that 
for  every  increase  in  the  rate  of  the  income  tax,  there  must 


'  Kur  a  Hiit>'l  accmuit  in  Kn);li.sh  uf  thi»  lau-,  sic  Hill,  "  I'he  I'russi.m  liusiness 
Tax,"  {hiiir/fiiv  [I'lii  11,1!  ■■{  I  i.'ui'nit.  ^.  %'.l.  M  i     lSc);i,  jip.  ~\  ,■.'>../. 

reii  Stiiiif^i/rufrt).      Ttus-   !«■  >  l,iw<  mil  Ix-   Tiunil  in  the    /ituiiiz  Arr/ni ,  vul.  \ 

(  '■'»''i  ■  VV   i^^  '"'  '•■'/■•  *'"!  I'P-  7V5  '■'  ^"Z- 
s 


p 


(  W     ' 


258 


T/ie  Inconu-   Tax- 


he  at  least  a  similar  increase  (but  at  most  not  more  than  one- 
half  as  much  ajjain)  in  the  rate  of  the  taxes  on  product.  If 
the  taxes  on  product,  however,  are  augmented  so  as  to  reacli 
one  hundred  and  tifty  per  cent  of  the  old  rates,  lurther 
increases  are  permitted  at  the  rate  of  two  per  lent  in  the 
income  tax  for  each  one  per  cent  in  the  taxes  on  jjroduct, 
until  the  latter  reach  two  hundred  per  cent  of  the  old  rate. 
Any  further  increase  of  the  rate  of  the  taxes  on  product, 
and  any  increase  of  the  income  tax  rate  beyond  double  the 
original  rate  can  be  permitted  only  in  exceptional  instances 
by  governmental  sanction.  As  this  has  sometimes  been  per- 
mitted, however,  it  means  that  the  state  income  t  ix  of  four  per 
cent  is  supplemented  by  a  local  tax  which  varies  all  the  way 
from  nothing  to  over  eight  per  cent,  making  the  total  income 
tax  payable  by  individuals  reach,  in  some  cases,  twelve  per  cent. 
If  we  add  the  supplementary  property  tax  (which  can  not  be 
increa.sed  by  local  additions),  we  have  an  income  tax  which 
in  some  cases  may  amount  to  over  thirteen  per  cent.  Finally, 
it  must  be  noted  that  for  local  purposes  the  income  tax  may 
be  assessed  on  corporations  without  deducting  the  three  and 
one-half  per  cent  income,  and  that  the  minimum  of  subsist- 
ence, fixed  at  900  marks  in  the  general  law,  may  be  reduced 
to  450  marks.  In  1895 -1896,  there  were  no  towns  of  over 
10,000  population  which  made  no  addition  at  all  to  the  income 
tax,  while  60  added  from  i  to  100  per  tent,  82  from  100  to 
1 50  per  cent,  38  from  1 50  to  200  per  cent,  and  22  over  200 
per  cent. 

§6.    TIic  Spnati  of  tlir  Movement  to  the  Oth.r  Cervian 

States 

The  adoption  of  the  Prussian  reforms  Ljave  the  signal 
for  a  great  movement  throughout  ("lermany.  I.ven  thou;^h 
Saxony,  Baden,  aiui  a  few  minor  states,  a^;  wi!  have  seen, 
had  preceded  Prussia  in  the  introductim  of  an  income  tax 
proper,  the  administrative  features  h.id  nowhere  been  worked 
out  so  careiully  ;  and  neither  in  these   stat<;s  nor  anywhere 


'i 


The  Income   Tax  in   (Jirma)iy 


259 


else,  had  the  other  features  of  the  PrusMan  ->-f.-m,  nar-^;;. 
the  supplementary  property  tax,  the  abolition  *  the  hi,?'- 
produce  taxes,  and  the  reform  of  the  lo-.a!  tax  h,^,t';rr,  !x;e; 
introduced.  But  now,  toward  the  erid  of  the  niij(,-ic(.-r>'';  c.r. 
tury  and  especially  durin,'  th'.-  rr^t  d'.  ade  of  the  twejit.eti 
century,  the  phenomenal  su'_.ess  <.'  the  FrusMa',  s.!>ter". 
produced  its  effect  upon  (,.ne  alter  arsother  of  the  Gerfriar. 
states. 

In  Saxony,  where,  as  we  know,  the  !nc'ir-,e  tax  had  oe'.orric 
the  chief  tax  in  1878  ar.i  where  hi  •  th'.-  \jei'j  of  the  onlv 
remaining  tax  on  product,  the  ;ar,-i  t;  -  ::«-:  bee-,  ?...e-ated  to 
the  rural  dis'rict?,  the  ir.corr.e  t;.>.  wa:-  ".'■ui'^ied  ,-.  Jf/jo  on 
Prussian  lines,  and  in  \^yo2  a  •--,,■,.', fcr.-.r:  •...•■■,  '  -  .pert,  tax  wat 
added.'  At  first,  howc\er,  :•,:«-  diC  r;ot  ;r.;.  u'^e  .a'jCeC  prop- 
erty, for  all  efforts  t.'i  ab^  ^i'-n  tr;e  r-.";a;nder  0:  t-.e  ic-./i  lax  ab 
a  source  of  state  revenue  j  r  ve-,'.  u'i  ..-.•.es'rf .  i  Jn  :'/jO, 
however,  the  pr^'  perty  t:.v  v-^  e\ter.'deu  s'  -c-  to  ;•■■'.  _.oe  ali 
property,  and  the  land  rax  —  t-e  ■-  '•.■  e>.>t:'  :.■  s.  •  .  :\  •■'  ■  '  '.u>: 
earlier  taxes  on  pr  .d  „•. e  — 
imf)ortance. 

In  Baden,  after  scr-.e  r 
1900,  all  the  taxes  on  ;  r  .d . 
and  convened  i-tn  a  s.:;):, 
where  the  income  f.;*'.  \ 
reform  c-f  1890  fcdiowe:. 
that  it  de\-e;'j;'cd  the  v.. 
mentar\'  tax.  %\''".iJe  lt  f' 
pr':>dL;ct  1  ■■  the     •. ;dit,e-  ■ 


Le  we'e  ..e' 


■ ' :  '.'  \ 

""  *J ,  V   S 

..■jO'-c: 

rrate 

,  -  ■  7 ,  t       ■  f ; 

:-v^2. 

■V>4 

and 

r.  I .'. .  "V  t 

b-_    .S'l 

*-•' 

/X 

•"-'rj'r"'. 

.L\ 

'  •        »  - 

ets^ 

Ci-* ' '  '^ 

•  80% 

tr,t 

;    * .  ■;  ^ 

■>  e". 

■- ,  ■  'se  ■ 

1' 

L, '-  u'-  ' 

I.    SI. 

■J  ',j  J  *.; 

5-.  ■ 


?    r.      .iii'::    .'/*'' 


P-o:e-s' 

■     }'  ;:   :■■■. 


.-.fK.     I  ■  :...    I  >y 


s:t  Uf  I.'  ••c---  ■ 


\:*s:  I:  ■d'^^  -<r'  '^ 


li       ./!    >r».i.' 


"Ln    i;'.-55>r. 


26o 


The  Income  Tax 


Neumann  was  the  great  protagonist  of  the  newer  system,*  the 
reform  was  not  effected  until  1903,  when  the  income  tax  was 
introduced.  It  was  supplemented,  not  by  a  property  tax  as 
in  Prussia,  but  by  a  combination  of  the  old  although  re- 
formed taxes  on  product,  namely,  the  land,  house,  business, 
and  capital  taxes.  These  were  all  reduced  in  rate  and  were 
henceforth  to  serve  the  purpose  of  taxing  funded  incomes 
higher  than  labor  incomes.^ 

Of  all  the  states  which  have  hitherto  proved  themselves 
recalcitrant  in  the  introduction  of  the  income  tax,  the  most 
important  is  Bavaria.  In  that  state,  where,  as  explained 
above,^  the  so-called  special  income  tax  had  been,  since  1856, 
nothing  but  a  tax  on  wages,  the  reforms  of  1899  were  limited 
to  an  improvement  of  the  old  taxes  on  product,  especially  the 
business  tax  and  the  capital  tax,  whereas  a  real  income  tax 
ha'  not  yet  been  introduced.  A  renewed  agitation  looking 
to\  rd  this  end  was,  however,  initiated  in  IQOS.*  In  addi- 
ti  to  Bavaria,  an  income  tax  is  still  lacking  in  the  two 
kicnburgs,  where  semi-mediaeval  conditions  are  so  strong 
c  political  as  well  as  in  the  economic  sphere,  and  in 
A  e- Lorraine,  where  the  example  of  the  French  tax  sys- 
te  vas  naturally  of  great  weight.  In  Alsace-Lorraine,  how- 
<t\  mpo-  -.nt  changes  were  effected  toward  the  close  of 
th  ntur-  consisting  of  a  modification  of  the  old  French 
m  ds  i  e  direction  of  the  German  system  of  taxes  on 
pr  d   .t  s  in   1895  there  was  established  a  new  house 

tax  ,  an  improved  business  tax  ;  and  in  1901  a  more 

moderr:      nd  tax,  as  well  as  a  tax  on  the  earnings  of  capital 


'  See  csp.  Neuin.iiin,  Die  fn  s,>iilitlifii  Steurrn  Tom  Einkonimen,  eto.  Tiitiin- 
^jen,  1S96.  \f\iniann  :Uti-inpls  in  this  wcirk,  ni't  Jiowevt'r  wiih  t'i»mpli'tc 
success,  to  explain  the  lact  that  personal  taxes  seem  lu  succeed  lietter  in  the 
northern  German  states,  an  I  u\es  on  produce  in  the  southern.      (/.  pp.  3-8. 

^  See  Kichmann,  "Die  Wiirtlemlxrgische  Stcuerrefonn  "  \n //irth's  .-imiit/fn 
ilii  D(u4si/ieii  A'eiihs,  1904;  and  Pistorius,"  Die  Wiirtti  mlietgische  Steuerreform," 
Finan:  Archiv,  vol.  xxi  (lc;04),  pp.   I-114. 

"  Suf'rii,  page  237. 

*  ('/.  K.  Steinit/er,  Dit  Ent-vi^keiuH^  zur  l-.inkommeHsteuer  in  Bayern. 
.Munich,  lyoy. 


The  Income  Tax  in  Germany 


261 


and  on  wages  and  salaries.     This  is  as  far  as  the  government 
dared  go.* 

In  all  the  smaller  German  states,  with  the  exceptions 
noted,  the  Prussian  system  has  either  been  adopted,  or  is  in 
process  of  being  adopted.'  The  general  income  tax  is  found 
in  ail  the  twenty-five  states  except  Bavaria  and  the  two 
Mecklenburgs  (and  also  excepting  Alsace-Lorraine),  while 
the  supplementary  property  tax  is  found  in  seven  states,  — 
Prussia,  Saxony,  Hesse,  Oldenburg,  Brunswick,  Sachsen- 
Coburg-Gotha,  and  Schaumburg-Lippe.  The  scheme  of  the 
income  tax  is  everywhere  similar.  The  exemptions  range 
from  300  to  900  marks ;  the  rate  of  the  tax  is  degressive,^ 
reaching  the  normal  figure  of  four  or,  in  some  states,  five  per 
cent,  on  the  higher  incomes,  and  with  abatements  and  ad- 
ministrative procedure  akin  to  those  in  Prussia. 


§  7.    Criticisms  and  Amendments,  igoo-igog 

Although  the  Prussian  tax  proved  to  be  so  remarkable  a 
success  from  the  treasury  point  of  view,  several  not  unim- 
portant defects  disclosed  themselves  in  the  course  of  the  next 
decade,  not  only  in  the  administrative,  but  in  the  substantive, 
part  of  the  law.     There  existed,  from  the  very  beginning  in 

'  An  excellent  account  in  French  of  the  reform  of  the  system  in  Alsace- 
Lorraine  is  I.'/mpit  sur  le  Rnifnu  en  Alsace-Ijirraine.  Hutoire  d'une  Re- 
forme  Jes  Conlrihutions  Direcles.  Par  Marcel  Routfie  et  Kernand  Mommeja. 
Paris,  1910.  A  good  account  in  German  is  that  of  J.  Kloos,  Die  Entwicieluiig 
der  Jirtkten  Sttuent  in  F.tsass-f.otlirini;cn.  Lei]),ng,  190S.  C/;  also  the  article 
by  Ludwig  Gieseke,  "Die  Entwicke'jng  der  direkten  Steucrn  in  Elsass-Loth- 
ringen  von  1872  bis  1905,"  /-'inanz  Anhi-J,  vol.  23  (1906),  pp.  558  el  seq. 

^  A  detailed  account — legislative  and  statistical  —  of  the  tax  system  of  each 
of  the  German  states  will  be  found  in  the  PeiiksihrifienhanJ  ziir  Hegriindung 
des  Enhuiirfs  eiius  Cesetzes  bftreffend  Aenderuiii^en  im  liiianzivesen,  jjublished 
by  the  (lerman  Imperial  Treasury  {Reiihssihatzamt).  Herlin,  1908.  See  csj-*- 
cially  the  highly  useful  comparative  tables  on  pp.  358-431.  In  the  Apf'endtx 
to  this  chapter  will  be  found  some  of  the  important  statistics  .-is  to  the  in^^me 
tax. 

"  The  detailed  scale  for  the  larger  states  will  be  found  in  Seligman,  /'rogressi-.'/ 
Taxation,  2d  ed.,  1908,  pp.  48-51 ;  and  Kennan, /wcowir  7d.r(Z,'i(i«,  1910,  chap. 
vii. 


f 


i  I  1 


I     ' 


363 


7/ie  Income  Tax 


1892,  in  wide  circles  of  the  taxpayers,  a  discontent  which 
manifested  itself  in  numerous  attacks  in  the  public  press, 
heated  discussions  in  the  legislature,  and  an  inordinate  mass  of 
appeals  against  the  assessments.  One  of  the  foremost  German 
experts  tells  us  that  the  earlier  years  were  marked  by  veri- 
table "enormities"  in  the  execution  of  the  law.'  While  this 
was  no  doubt  in  part  due  to  the  newness  of  the  law,  the  fact 
remains  that  even  after  the  lapse  of  a  decade  the  dissatis- 
faction continued  and  was  expressed  in  similar  terms.  The 
conclusion  is  inevitable  that  the  causes  are  to  be  sought,  in 
part  at  least,  in  the  law  itself  as  well  as  in  the  manner  of  its 
execution.  In  the  fifteen  years  that  elapsed  from  the  passage 
of  the  law  to  its  amendment  in  1906,  the  yield  of  the  income 
tax  rose  from  one  hundred  and  twenty-five  million  to  two 
hundred  and  ten  million  marks,  whereas  the  population  in- 
creased only  from  thirty  to  thirty-seven  and  one-quarter 
millions.  This  was  of  course  due  primarily  to  the  fact  that 
wealth  was  increasing  faster  than  population.  But  it  was 
also  in  part  due  to  more  efficient  administrative  methods. 
The  success  from  the  fiscal  point  of  view,  however,  was  ac- 
companied by  an  undue  pressure  on  the  taxpayer,  of  which 
we  have  abundant  testimony. 

The  Prussian  law  has  been  sharply  criticised  by  foreign 
observers,  especially  by  the  French  investigators.  Thus 
Paul  Deschanel  is  never  weary  of  speaking  of  the  "  inquisi- 
torial processes  of  this  country  which  has  been  hierarchised 
and  iiilitarized  to  the  extreme,  and  in  which,  to  adopt  Bis- 
marck's term,  every  one  is  born  in  a  uniform."^  Reinach, 
in  a  discussion  in  the  French  ch  imber  of  deputies  in  1908, 
stated  that  in  Prussia  "they  have  been  obliged  to  resort  to  an 
intolerable  espionage,  and  a  degrading  system  of  informers ; 
they  interrogate  caterers,  neighbors,  servant.s,  children  ;  they 
keep  account  of  the  dinners  that  are  given  and  of  the  cigars 

'  See  p.  272  (if  the  work  of  Kuistinj;,  quoted  below. 

'•'  "  I,e»  jiruceili'j  iiu|uisitoriau\  lie  te  pays  hicran  iiisc  t-t  militarise  a  outrance, 
ilans  lecjuel  suivant  le  mot  ilc  M.  ilc  Hisman  k  ihacun  natt  avec  un  uniforme."  — 
Ouoteil  in  (last 'n-l'>ros,  I.' Imfi'l  sur  ie  AV  <«m.     I'ariv.  m  ~~,  (>.  .?yi. 


The  Income   Tax  in   Germany 


263 


that  are  offered  to  the  guests." '  The  French  Minister  of 
Finance,  M.  Caillaux,  used  some  rather  hard  word':,  about  the 
German  methods.'-'  In  Belgium,  a  recent  author  has  pre- 
sented in  great  detail  samples  of  the  questions  that  are  put 
to  different  kinds  of  taxpayers,  when  tltcy  have  to  submit  to 
their  oral  examination.  These  are  shown  to  enter  into  the 
very  minutia;  of  daily  existence.''  Some  of  them  are  worthy 
of  repetition. 

A  tradesman  was  asked,  "  Don't  you  use  a  telephone  for 
your  private  use — ^that  is,  apart  from  business  purposes.'" 
He  answered  "  No."  Hut  when  it  was  discovered  that  he 
had  ordered  a  box  at  the  theatre  by  telephone,  he  was  pun- 
ished by  an  additional  assessment.  A  financial  magnate 
was  asked  about  his  securities:  "How  many  did  you  sell 
last  year .'  On  what  day  and  at  what  exchange  did  you 
sell  them .'  What  is  the  price  of  each .'  What  is  the 
name  of  each  company  in  which  you  own  securities .'  Who 
are  your  associates  ?  How  nuicii  do  you  save  every  year .' 
What  do  you  do  with  it .'  How  do  you  explain  the  increase 
of  income  this  year.'  Is  it  derived  from  capital.'  If  so, 
where  did  the  capital  come  from.'  Was  it  a  gift.'  Who 
gave  it  to  you.'  Is  it  the  result  of  a  profitable  sale.'  If  so, 
tell  us  all  about  it."  A  hou.'^e  owner  was  asked :  "  Do  you 
intend  to  raise  the  rents  of  the  tenants.'  Have  you  invested 
the  money  which  you  got  from  selling  some  furniture  last 
year.'"  A  farmer  was  asked:  "  How  many  cows  have  you 
got.'  How  much  milk  and  butter  does  each  one  give.'  How 
many  chickens.'  How  much  hay  was  consumed  by  your  own 
cattle,  and  how  much  did  you  sol! .'  What  is  the  value  of  the 
fruit,  vegetables,  and  other  farm  produce  that  you  and  your 
family  consumed  last  year?  Did  the  owner  from  whom  you 
rent  your  lands  really  pay  a  mortgage  on  his  property  last 


'  "  Kn  Prusse  il  a  fallu  en  vt-nir  a  un  <  spiDnnafju  intoKrable  ct  Ti  unc  Hclatinn 
ilct;ra<lnme;  on  iiitfrru)»f  Its  f.niniissriirs,  Ics  vui^in^,  Ics  ilomesti'iufs,  Ic-s  cnfanls; 
en  tunt  cmptc  lies  (liniTs  1!  niR'«, 'Ic*  uj;.\res  ..Herts  all^i  invites."  —  Speech  of 
Kcb.  2,  19CX).  in  the  , '1,1  in!')-,  d,-i  J./<nl'<.  -  >'•<■■  in/'.i,  thap.  ii,  §  9. 

'  Ingenbleek,  l.'Iml'it  iur  U  Ke-fnu.     I'.ruvellrx,  1,  o.S,  pp.  JJ4-232. 


364 


The  Jmome  Tax 


•<j^^t)  Have  you  not  put  the  wear  and  tear  of  your  agricul- 
tural machinery  too  high  ? "  A  commercial  traveller  was 
asked :  "  How  much  do  you  ordinarily  spend  in  your  trips  ' 
How  much  do  you  spend  for  amusement  ?  What  are  yuur 
other  expenses  ? " 

It  is  questions  like  these  that  led  one  of  the  liberal  mem- 
bers of  the  Reichstag,  von  Kyiiern,  to  say  that  "  the  country 
is  covered  with  a  perfect  system  of  espionage." ' 

Such  comments,  however,  are  not  confined  to  foreigners  or 
to  German  liberals,  from  whom  it  would  be  easy  to  multiply 
criticisms  of  the  law.  We  shall  content  ourselves  with  the 
published  animadversions  of  a  most  competent  and  unbia.ssed 
observer,  the  President  of  the  Royal  Administrative  Supreme 
Court  of  Prussia  —  Herr  Kuisting.  In  a  large  volume  de- 
voted entirely  to  this  subject,'  Fuisting  discusses  in  detail  the 
chief  defects  of  the  Prussian  law. 

Among  the  defects  in  the  substantive  part  of  the  law 
Fuisting  mentions :  ( i )  the  taxation  of  corporations  in  a  per- 
sonal income  tax,  side  by  side  with  the  business  tax;  (2)  the 
inclusion  of  speculative  profits;  (3)  the  failure  to  define  with 
precision  the  permissible  deductions  from  gross  receipts,  in 
order  to  reach  the  real  income,  more  especially  with  reference 
to  taxes,  interest  on  debts  and  amortization  quotas;  (4)  the 
inadequate  abatements  for  the  lower  classes ;  (5)  the  incorrect 
determination  of  the  income  period,  which  is  fixed  in  some 
cases  at  the  previous  year,  in  others  at  the  coming  year,  and 
in  still  others  at  an  average  of  several  years;  (6)  the  taxation 
according  to  households  instead  of  individuals.  Among  the 
defects  in  administrative  procedure  are  mentioned  a  great 
number  of  details,  all  of  which  may  be  summed  up  in  the 
accusation  that  while  the  interests  of  the  treasury  are  admira- 

*  "  Eine  vnllstSndige  Spionage  Qber  das  ganze  land  vcrbrcitet  wird." 

*  Die  hinkommemhiUeuerut^i  Jtr  /.ukuitft  in  /Inknupfung  an  Jiu  Prtus- 
sisc/ie  EinkommensUnfr-aesitz.  Von  H.  Kuisting,  Senats-Prasidenten  <le«K6ni(j- 
lichen  Oberverwaltungsgeriehts.  Berlin,  190J.  Ihe  principlc!i  underlying  hit 
strictures  are  discussed  in  a  separate  volume  entitled  Grundziigt  der  Sttu^rUhrt. 
lierlin,  1903. 


t 


.-^,... ^„.  .-^ 


The  Income   Tax  in  Gemtat, 


ly 


a65 


bly  safeguarded,  the  rights  of  the  taxpayers  are  sadly  neg- 
lected, leading  to  a  "one-sided  fiscal  development,"  to  an 
" overzeaiousness  of  officialdom,"  to  "an  exaggerated  con- 
sideration of  purely  fiscal  interests,"  and  to  a  "  riotous  and 
luxuriant  growth  ot  petty  bureaucracy."'  This  is  seen  in 
the  facts  that  in  1900  over  71  per  mill  of  the  assessments 
were  appealed  from  (in  some  towns  as  high  as  134  per  mill), 
and  that  the  court  of  apjHJals  upheld  forty-seven  per  cent  of 
the  complaints.  This  situation,  wc  arc  told,  argues  most  un- 
healthy conditions,"''  which  have  been  only  partly  cured  by 
decisions  of  the  supreme  court.  In  other  respects,  also,  we 
are  informed  that  "abuses  of  the  worst  kind"  have  de- 
veloped.* So  the  commission,  which  was  suppo.sed  in  some 
measure  to  protect  the  tax|)ayer,  has  become  a  mere  orna- 
mental addition  to  the  presidin},'  officer,  who  conducts  all  the 
inquisitional  examinations  himself.*  The  most  deplorable 
fact  is,  in  our  critic's  opinion,  that  the  officials  themselves 
seem  tmable  to  recognize  the  disadvantages  and  dangers  of 
the  system.*  They  appear  to  bo  still  impressed  with  their 
own  capacity  to  set  an  exact  valuation  on  everything,  and  to 
regard  this  as  a  panacea  according  to  the  old  rule  :  — 

'•  Was  sich  nicht  antlers  finden  lasst, 
Da.s  stellt  man  leicht  diirth  Schatzcn  fcst."'  * 

As  an  actual  fact,  however,  the  result  is  a  "  complete  confu- 
sion in  the  matter  of  valuation,  with  a  checkered  variety  and 
inadequacy  of  the  methods  employed."  "     It  is  true  that  wil- 

'  The  worils  used  arc  "  i-int'  einsfitij;  tinl-ali^i  lie  Kklitung." —  O/.  tit.,  p.  4  ; 
"Uebereifer  des  Iteamtenthums,"  p.  5;  "  lim-  ubermiis/iKt.'  IJeruiksiilitigung 
der  tiikali!ichen  Intcresscn,"  p.  149  ;  "  Uel>erwuchern  de»  Subtltern-beamten- 
thums,"  p.  162.     I'f.  also  p.  lyo. 

■^  "  Kin  hckhst  ungosumlcr  Zust.ind."  —  Op.  lii.,  p.  ijj. 

'  "  Ks  habcn  sich  Mis/,»tan(le  der  schlimmsten  .Art  herausgebihiet  " —  Of.  dt„ 
p.  184. 

*  "  Blosses  Ornament  des  liscalisthen  Vomitzenden.  Kine  F-rm  uhne  Inhalt." 
—  Op.  cit.,  p.  176.  '  Of.  ill.,  p.  189.  "  Of  at.,  p.  ai  I. 

""Der  Ijanr.e  Wirrwarr  im  Schat^ungsweseii  mit  der  Buntscheckigkeit  und 
I'nviillkiimmenheit  der  anRew.indlin  Metlmden  sowie  der  L'nrichtigkeit  und 
Ungleichmaszigkeit  ihrcr  Ergebni^se."  —  Op.  <it.,  p.  247 


■'*.s 


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MICtOCOPY    RESOLUTION   TEST   CHART 

(ANSI  and  ISO  TEST  CHART  No   2) 


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1.8 


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^5  (716)    288  -  5989  -  Ta- 


I 


266 


The  Income  Tax 


ful  opposition  to  the  law  has  gradually  diminished.  We  are 
told  that  "  the  cases  of  actual  fraud  arc  certainly  not  sporadic, 
but  still  they  are  not  frequent."  '  This  result  is  purchased 
at  a  great  cost,  however.  The  distinguished  jurist  concludes 
that  if,  after  more  than  a  decade,  despite  the  determined 
efforts  of  the  courts,  the  procedure  still  suffers  from  so 
many  and  such  important  defects,  nothing  can  be  hoped 
for  from  the  bureaucracy  itself,  and  it  becomes  necessary 
to  define  by  law  the  rights  as  well  as  the  duties  of  the  tax- 
payers. 

£0  serious  an  indictment  of  the  system,  coming  from  such 
a  source,  could  not  well  be  ignored.  Consequently,  after  a 
discussion  which  was  resumed  again  and  again,  some  at  least 
of  the  weaknesses  of  the  law  were  removed  by  the  amendatory 
act  of  1906.'^ 

The  first  amendment  in  the  law  of  1906  concerned  the  inclu- 
sion of  limited-liability  companies.  In  the  original  act,  the 
so-called  "  open  commercial  associations  "  {offcnc  Handcls- 
gesellschaftcn),  i.e.,  the  small  semi-private  associations,  had 
been  exempt  from  taxation  (although  the  individual  owners 
naturally  remained  taxable),  while  ordinary  stock  corporations 
were  taxed  on  the  surplus  income  over  three  and  one-half  per 
cent.  In  the  interval,  however,  these  new  limited-liability 
companies  had  undergone  a  great  development,  so  that  their 
capital  now  represented  over  one  and  one-half  billions  of 
marks,  as  compared  with  six  billions  invested  in  stock  corpo- 
rations. After  much  discussion,  these  new  limited-liability 
companies  were,  as  a  compromise,  declared  subject  to  taxation 
at  the  full  rate  (not  simply  on  the  surplus  over  three  and  one- 
half  per  cent),  but  the  shareholders  were  exempted.  As  a 
compensation  for  this,  a  slightly  increased  scale  of  taxation 
was  adopted  for  the  limited-liability  companies.^     Scientific, 

'  op.  at.,  p.  138. 

^  Law  of  June  19,  1906.  This  is  discussed  by  Maatz,  "  Hie  Novelle  zum  preus- 
sischen  Einkcmmcnsteucr-  uiul  KrjjUnzungs-steuergesetz "  in  finmiz  Arch.v, 
vol.  xxiii  (i()o6|,  ]i|).  556  et  St'i/. 

'  I'or  this  scale,  sec  ^ehjjiiian,  /'>i\i;iessivf  '/ <i.\iilioii.     2(1  e<l.,  1908,  p.  49. 


^  w^Z'?^^^^m:s^?w^m.'^^ww^¥^i 


TJic  Income   Tax  in  Germany 


267 


educational,  philanthropic,  and  artistic  associations  were  also 
exempted,  but  cooperative  consumers'  associations  wcie  now 
made  liable  to  the  tax, largely  because  of  the  prodigious  success 
of  the  Breslai'  cooperative,  with  fourteen  million  marks  turn- 
over and  two  millions  of  profit. 

In  the  second  place,  the  ascertainment  of  actual  income 
through  deductions  from  gross  receipts  was  made  more  pre- 
cise by  including  among  the  permissible  deductions  the  fol- 
low],, g  items  :  ( i )  not  only  any  direct  state  tax,  as  in  the  law 
of  lo^i,  but  also  the  local  taxes  on  product,  at  least  up  to  a 
certain  amount,  as  well  as  various  special  assessments;  (2) 
contributions  to  the  compulsory  labor-insurance  funds;  (3)  in- 
surance premiums  for  children;  (4)  additions  to  a  sinking 
fund  for  mortgages.  In  all  these  cases  except  the  first,  the 
deductions  applied  only  up  to  600  marks  ;  and  in  the  last 
case  only  up  to  one  per  cent  of  the  indebtedness. 

In  the  third  place,  the  old  distinction  between  fixed  and 
certain  incomes  ^  which  had  given  a  great  deal  of  trouble,  was 
abolished.  The  income  for  the  year  just  closing  is  taken  as 
the  taxable  income  in  all  cases,  except  in  that  of  associations 
as  well  as  of  individuals  engaged  in  trade,  industry,  or  agri- 
culture where  careful  bookkeeping  is  practised.  In  such 
cases  the  average  of  three  years  is  taken,  and  the  losses  of 
one  year  may  \  z  deducted  from  the  profits  of  another. 

In  the  fourth  place,  the  character  of  the  tax  as  one  on 
household  income  was  considerably  changed  in  that  only  the 
vsife's  income  is  henceforth  included  with  that  of  the  husband. 
Finally,  so  far  as  abatements  are  concerned,  an  important  in- 
novation was  introduced,  making  the  abatement  for  '^hildren 
applicable  to  any  member  of  the  family  (except  the  wife), 
dependent  on  the  head  of  the  household  —  thus  including 
parents  and  other  relatives.  Furthermore,  the  privilege  was 
expanded  from  3000  to  6500  marks  (the  attempt  to  extend  it 
still  further  to  9500  marks  failed).  Finally,  not  only  were  fifty 
marks  deducted  for  each  child  or  other  dependent,  but  the 
taxpuyer  is  henceforth  entitled  to  a  reduction  of  one  grade 

'  See  sn/'r.i,  p.  251. 


y 


268 


Tlie  Income  Tax 


in  the  case  of  three  children  and  of  two  grades  in  the  case  of 
five  children. 

The  second  part  of  the  amendment  related  to  the  adminis- 
trative procedure.      Here  several  changes  were  introduced. 
The  .scheme  requiring  employers  to  submit  lists  of  wages  and 
salaries  paid  to  their  employees  was  adopted,  following  the 
cuE'om  in  Saxony  and  Austria.     The  punishment  for  failure 
of  the  individual  to  hand  in  his  declaration  betimes  was  con- 
verted from  a  loss  of  his  right  to  appeal  into  a  money  penalty 
of  five  per  cent.     The  far-reaching  privileges  of  the  presiding 
officers  of  the  assessment  commission  were  materially  reduced, 
and  various  minor  changes  were  made  in  the  interests  of  the 
taxpayer.     On  the  other  hand,  the  right  of  appeal  to  the 
supreme  court  was  entirely  taken  away  from  taxpayers  with 
incomes  of  3000  marks  or  less,  and  the  powers  of  the  com- 
mission itself  in  general  were,  if  anything,  augmented,  so  that 
the  practice  of  detailed  inquisitorial  questioning  and  of  inspec- 
tion of  the  books  and  papers  now  received  legal   sanction. 
The  commission  may,  as  a  consequence,  now  examine  the 
taxpayer  and  any  witnesses  that  it  chooses  to  summon,  and 
may  require  him  to  show  his  "business  books,  contracts,  re- 
ceipts, or  any  other  papers  which  may  be  of  use."  ^     If  the 
papers  are  not  deemed  satisfactory,  the  commission  may  take 
whatever  action  it  likes.2    Thus  the  most  far-reaching  and 
arbitrary  powers  are  given  to  the  commission.     It  is  signifi- 
cant of  the  temper  of  the  German  people  that  in  the  discus- 
sion which  preceded  the  enactment  of  the  law,  no  one  rose 
to  oppose  these   particular  provisions.     It   cannot   be   said, 
therefore,  that  the  real  objections  of  Fuisting  have  been  ade- 
quately met 

The  most  recent  change  in  the  Prussian  income  tax  is  the 
general  increase  of  rates  effected  by  the  law  of  1909.  For 
some  years  an  effort  had  been  made  to  augment  the  excced- 

1  Par.  40.      Cf.  luisting.  ofi.  cil.,  p.  567. 

•^  The  discussion  uf  the  legal  decisions  up  to  1909,  as  to  the  provisions  which 
led  t.'  the  atncndnicnt,  may  be  found  in  the  article  of  I,.  Huck  in  the  Fitianz 

.U\hii,  vui.  xxu  1  I._/Gyi,  |,(j.  o>i  j  el setj. 


The  Income   Tax  in  Germany 


269 


ingly  exiguous  salaries  of  the  Prussian  officials,  and  in  1909 
provision  was  made  to  procure  a  revenue  for  this  purpose. 
The  final  disposition  of  the  matter  was  to  be  effected  by  a 
general  revision  of  the  tax  laws,  but  in  the  meantime  the  rates 
of  the  income  tax  were  increased  for  what  purported  to  be 
only  a  three-year  period.  Because  of  the  temporary  charac- 
ter of  the  arrangement,  the  alterations  were  inserted  not  into 
the  income  tax  law  itself,  but  in  the  so-called  "  Cioak  "  or 
"Garment"  'LdLVi  {Mantelgesetc)}  The  rates  were  increased 
for  individuals  by  from  five  to  twenty-five  per  cent ;  for 
limited-liability  companies  by  from  seven  and  a  half  per  cent 
to  forty-five  per  cent ;  for  stock  companies  by  from  ten  per 
cent  to  fifty  per  cent.  The  local  additions  to  income  tax, 
however,  were  to  be  made  on  the  old  basis. 

Advantage  was  taken  of  the  discussion  to  effect  one  impor- 
tant change  in  the  income  tax  itself.  This  concerned  the  sub- 
ject of  abatements.  The  changes  of  1906  which  have  been 
mentioned  above  were  found  to  be  inadequate,  and  accord- 
ingly a  new  law  was  passed  in  1909.'*  This  not  only  extended 
the  privilege  of  abatem.ents  from  incomes  of  6500  to  those 
of  9500  marks,  but  increased  the  abatements  themselves.  In 
the  case  of  incomes  not  exceeding  6500  marks,  a  reduction 
of  one  grade  was  permitted  for  two  children,  or  other  depen- 
dents ;  of  two  grades  for  three  or  four  children  or  dependents ; 
of  three  grades  for  five  or  six  children  or  dependents ;  and  of 
an  additional  grade  for  every  two  additional  children  or  de- 
pendents. In  the  case  of  incomes  between  6500  and  9500 
marks  there  was  permitted  a  reduction  of  one  grade  for  three 
children  or  dependents,  of  two  grades  for  five  or  six  children, 
and  of  one  additional  grade  for  every  two  children  or  de- 
pendent members  of  the  family.  The  other  important  part 
of    the   amendment   was    the   extension   of    abatements   for 


'  Gesetz  v.  26.  Mai,  1909.  For  the  exact  figures,  ff.  the  Finiinz  .Irn'tii,  vul. 
xxvi  (1909),  p.  809.  The  annual  figures  as  to  the  yielil  nf  the  Prussian  incume 
tax  may  be  found  in  Mitfhei/inigi-ii  <jns  </,'r  Vtr-uutltuni^  ihr  direkten  Sleuern  im 
premsisthen  S/mite.     Slatislin  Jtr  preuauchen  F.inkomincnsteuern. 

~  r'liiitLii  ill  Itiuim  .iiii'ii,,  \m1.  .\xvi  (ii(oi^),  [I.  807. 


270 


The  Income  Tax 


"exceptional  causes"  affecting  tiie  taxpayer's  ability  to  pay 
from  9500  to  12,500  marks. 

The  minor  changes  in  the  law  were  the  permission  to  esti- 
mate incomes  according  to  the  business  rather  than  the 
calendar  year,  and  the  provision  making  the  income  tax  law 
conform  to  the  new  and  revised  imperial  act  of  1909  regulat- 
ing the  entire  subject  of  double  taxation.*  This  law  provides 
that  when  the  trade  or  industry  is  carried  on  in  several  states, 
only  a  proportionate  part  of  the  income  can  be  taxed  in  any 
one  state.  The  commonwealth  laws  must  all  conform  to  the 
imperial  law. 

§  8.    Conclusion 

If  we  try  to  form  a  conclusion  as  to  the  German,  and  es- 
pecially the  Prussian,  income  tax,  it  is  evident  in  the  first 
place  that  it  has  become  an  effective  fiscal  engine.  Step  by 
step,  as  we  have  seen,  the  theory  of  the  law  was  bettered  and 
the  administration  was  improved ;  while  the  opposition  of  the 
people,  which  was  at  first  quite  as  keen  and  determined  as  in 
England,  was  slowly  overcome,  until  they  became  satisfied 
with  the  drastic  methods  introduced  toward  the  end  of  the 
nineties.  The  German  administration  is  admirably  efficient, 
and  the  public  has  a  well-merited  confidence  in  the  officials. 
Two  considerations,  however,  force  themselves  upon  our 
mind. 

In  the  first  place,  the  German  system  of  direct  assessment 
does  not  seem,  even  from  the  fiscal  point  of  view,  to  be  as 
satisfactory  as  the  English  system  of  stoppage  at  source.  As 
will  be  seen  from  the  table  in  the  appendix,  the  income  tax 
yielded  in  all  Germany  in  1908,407  million  marks  (about  102 
million  dollars)  for  state  purposes.  To  this  ought  be  added 
the  proceeds  of  the  supplementary  property  tax,  62  million 
mark.s,  making  a  total  of  about  117  million  dollars.  To  this 
might  further  be  added  the  sums  raised  for  local  purposes, 
which   amounted   to  301   million  marks  in  localities  of  over 

1  DeutSihes  Paf^pelsti-uergesetz  v.  22  Marz,  I909.  Printed  in  Fiitunz  Archiv, 
vul.  xxvi  (1909;,  p.  j6g. 


The  Income   Tax  in  Germany 


271 


10,000  people  alone.  The  total  yield  of  the  income  tax  in  all 
divisions  for  the  whole  of  Germany  was  768  million  marks  or, 
including  the  supplementary  property  tax,  over  830  millions  — 
about  208  million  dollars.  In  view  of  the  fact  that  the  tax  does 
not  exist  in  liavaria  as  well  as  in  two  of  the  smaller  states,  it 
might  be  claimed  that  the  German  system  coitipares  not  un- 
favorably with  the  English  and  that,  in  fact,  more  revenue  is 
raised  by  the  income  tax  in  Germany  than  in  England.  It 
must  be  remembered,  however,  that  in  the  above  computation 
the  income  tax  in  Germany  includes  both  local  and  state  taxes, 
and  that  the  total  rate,  accordingly,  is  much  higher,  rising  to 
as  much  as  twelve  or  fifteen  per  cent  on  the  income  in  some 
cases ;  whereas  in  England  the  rate  is  only  five  or  six  per 
cent.*  Moreover,  the  exemptions  and  abatements  are  very 
much  more  limited  than  in  England,  so  that  the  yield  ought 
to  be  proportionately  greater.  As  a  matter  of  fact,  however, 
the  yi'  Id  for  state  purposes  is  far  smaller  than  in  Great  Britain, 
notwithstanding  the  population  of  Great  Britain  is  only  about 
two-thirds  that  of  Germany.  The  relatively  unfavorable  re- 
sults of  the  German  tax  are,  of  course,  in  part  due  to  the 
fact  that  Germany,  although  it  has  made  such  immense 
strides  of  recent  years,  is  nevertheless  not  so  wealthy  as  Eng- 
land, and  that  the  whole  scale  of  incomes  is  lower.  Even 
allowing  for  these  facts,  however,  it  is  impossible  to  avoid  the 
conclu.sion  that  the  administrative  methods  are  both  more 
costly  and  less  effective  in  Germany  than  in  England.  As  a 
mere  fiscal  engine,  the  German  income  taxes  are  inferior  to 
the  English. 

In  the  second  place,  the  administrative  methods  employed 
in  Germany,  and  especially  in  Prussia,  would  be  impracticable 
almost  anywhere  else.  In  no  other  place  is  the  bureaucracy 
so  powerful.  Nowhere  else  are  the  people  so  meek  in  the  face 
of  officialdom.  In  no  other  country  of  the  world  would  it  be 
possible  to  enforce  so  inquisitorial  a  procedure  as  we  have 

*  In  the  DenkschtiflenbiuiJ,  vol.  i,  pp.  788  rl  seq.,  will  be  found  a  number  of 
elaborate  tables  caleulatinj;  tht-  tiit.-i!  rrits-  ^:f  thi-  ini-r.m.-  ta\  -.n  ;h.-  !.-a!  -livisions 
of  the  nine  chief  states  of  Girnian) ,  arranged  according  to  scales  uf  income. 


272 


The  Income  Tax 


learned  to  be  customary  in  Prussia.  And  even  with  all  these 
rigorous  and  stringent  methods,  it  is  questionable,  to  judge 
from  the  fiscal  results,  whether  the  frauds  and  evasions  are 
appreciably  less  than  in  England. 

Taking  it  all  in  all,  however,  the  German  income  tax,  which, 
as  in  England,  has  been  the  slow  product  of  a  long  evolution, 
must  be  prone  anced  a  decided  success.  It  is  accepted  by 
the  people;  it  has  become  indispensable  to  the  government. 
Its  methods  of  assessment  are,  on  the  whole,  in  conformity 
with  public  opinion,  the  honest  taxpayer  has  but  little  to  fear 
from  even  the  most  rigorous  officials,  and  the  tax  now  consti- 
tutes not  only  an  important,  but  an  increasingly  important, 
part  of  the  general  tax  system. 


■-^iMKi&'-^-^&r^r 


APPENDIX 

Arranged  fron  pp.  38.  572,  575,  576,  734,  of  the  D*nksckri/I*itt<uut  ttkntA  to  supra,  p  261 


STAim  Rbvihuis,  Budcbt  or  i^ot 


In  mirki,  000  omitted  e«ccpl  io  column  $. 


Prussia 

Bavaria 

Saxony    

Wiirtemburg 

Bad" 

Hesse 

Mecklenburg-Schwerin  .  . 
Grandduchy  Saxony  .  . 
Mecklenburg-Strelitz      .     . 

Oldenburg 

Brunswick 

Sachsen-Meiningen  .  .  . 
Sachsen-Altenburg  .  .  . 
Sachsen-Coburg-Gotha  .     . 

Anhalt 

Schwarzburg-Sondershausen 
Sch  wantburg- Kudolstadt 

Waldeck 

Reuss,  old  line  .... 
Keuss,  new  line  .... 
Schaumburg-Lippe     .     .     . 

Lippe 

Lubeck 

Bremen 

Hamburg 

Alsace-Lorraine     .... 
Total  ~ 


Total  Revc- 

nu« 


W9.S3S 
633,191 
387419 
219,224 
240439 

114.935 
41.868 
12,719 

4497 
43.942 
27.799 

9.405 

S.393 
6.777 
14461 
3.345 
2,853 
1,389 
'.253 
2,638 

974 

3-»67 

12,857 

43,224 

162,902 

66,267 


5,381,773 


Total 
Direct 
Tiaet 


287,369 
46,058 

60,595 
26,928 

24,994 

14,298 

3.700 

3,544 

553 
4,892 

4.743 
1.982 
1.766 
2,045 
3,226 

709 
707 

396 

639 

1,260 

292 

',139 

3,749 

15,267 

57.690 
15,690 


584,090 


IncooM 
Tu 


240,000 

5',575 
18,000 
15.600 
10,860 

3,'04 

2.630 

3.219 

'•330 

1.278 

'.645 

2,415 

534 

561 

252 

548 

1,100 

235 

720 

2,910 

10,677 

38,480 


4 

Supple- 
mentary 
Property 
Tat 


Taa 
Hex) 


6 

Per 

Cent  of 

Toul 

Taxes 


44,000  I      6.44  I  70  22 


407.586 


4,005 
9.215 

3,355 


855 


205 


54 


11.44 

7.82 
7.76 
8.98 

8. 

5-99 
6.36 

4-95 
6.19 
679 
736 
5  93 
4.76 
4.27 

7  77 
7.61 

5.22 

4-95 
27.49 

40.53 
43.98 


73-3' 
4356 
3590 
54-37 

80.96 

45- 

59.08 

65.44 

61.78 

71-30 

(>19i 

70.59 

62.52 

61.62 

80.96 

84  II 

72.62 

60.14 

60.96 

5965 

57-56 


62,425  '    6.72  I  52.91 


RlUKUES  or  I..H  Mn.rs  or 
10,000  Poftiij.n..N,  t.f,-j  < 

7 
Popula. 
tion  ill 

1905,  OCX) 

omitted 

Total 
I'irct  1 
1'ajic» 

« 

Incnme 
Ta. 

15.148 
1.816 

423-312 

37.5«4 

344.7«i 
288 

2.073 

571 
594 
306 

34.595 
16,240 

14.4^7 
9.^44 

29.278 
5.044 

4--;  17 

5,421 

•5< 
125 

'•327 
1.815 

47« 
1,807 

23 

83 

182 

5^^ 

230 
1,125 

3.«0O 
..238 

J4 

775 
2.924 
1,027 

49 

773' 

649 

59 

1,079 

921 

142 
16 

2,272 
303 

2.153 

240 

12 

201 

190 

23 
46 

525 
946 

«3 


169 


23  54:! 

23  272 

_472        4-^49 

!2,0I7 

1 
i 


'57 

106 

164 

59 

557.200  300.711. 
or53.98Z. 
df  tin;  di- 
rect Uxos 


'  .\bout  tbree-fourths  r.  the  entire  local  revenue.     Out  of  a  total  revenue  of  all  local  divisiors  in  the  empire  of  3138  milliun,  of 
marks  tlie  localities  of  over  10,000  population  had  a  revenue  of  3393  millions. 


sm^^^^'^m^ 


I 


'-.-,^^- 

<*.»'*1 


CHAI'TI'R    H 


Tiir  Imomk  Tax  in   Fkanck 


The  fiscal  work  of  the  Revolution  consisted  in  siihstitutin;,' 
for  the  personal  taxes  of  the  amim  rci^tnu  a  system  of  so- 
called  real  taxes,  or  taxes  on  product.  The  alni^es,  incipiali- 
ties,  and  jJrivileKCs  connected  with  the  old  methods  had  been 
so  potent  a  cause  of  the  Revolution  that  the  very  lirst  step 
was  to  make  a  clean  sweep  of  the  entire  existing;  system. 
It  was  hoped  at  first,  somewhat  under  the  influence  of  the 
Physiocratic  doctrines,  to  defray  all  the  public  expenditures 
by  a  new  system  of  direct  taxes  alone ;  but  this  proved 
to  be  impossible,  and  one  by  one  the  indirect  taxes,  in  a 
modified  and  improved  form  indeed  and  largely  denuded 
of  their  old  abuses,  were  gradually  reintroduced.  So  far, 
howevei,  as  the  direct  taxes  were  concerned,  it  was  universally 
conceded  that  all  excuse  for  inquisition  and  for  arbitrariness 
must  be  avoided ;  and  as  a  consequence  a  system  of  taxation 
was  elaborated,  based  primarily  on  the  thing  to  be  taxed  and 
not  on  the  person  of  the  taxpayer. 

The  system  of  direct  taxation  which  was  created  in  the 
last  decade  of  the  eighteenth  century  exists  with  slight 
modification  to-day.  It  comprises  four  principal  imposts:  the 
real  estate  tax  {contribution  foncii'n),  including  botli  land  and 
buildings;  the  business  ta.\  (f'a tat tcs);  the  door  and  window 
tax  {cotttributioii  dcs  portcs  ct  fcnctns);  and  the  personal  and 
personal  property  tax  (contribution  pcrsonncllc  ct  mobilicrc)} 

'  The  fullest  account  of  the  details  of  the  Krench  system  at  presen'  is 
found  in  Tntil'  de  i Inif'ot  Dinct,  by  .Marcel  Tri-lat,  in  i nlhilior.Ati  iii  uitli 
Corneille  Herget  and  Dessart.  2  vols,,  Paris,  1902.  .\  shnrtir  acioum  wiii  lie 
found  in  Cdtin  El'mfntaire  ./,  S.ieiii,  d,s  riiuutifi  ct  .!<■  /'i;isl,in,ii  liiuiii  I'ne 
JriitKiciise,  by  Gaston  Jeze.     Paris,  new  cd..  1909. 


'tm^'l 


■W^i^n^^^^-^^ 


274 


The  Income  Tax 


The  real  estate  tax  is  divided  into  two  parts,  the  land  and 
the  building  tax.  The  land  tax  is  levied  on  the  assumed  net 
produce  of  the  land  as  determined  by  a  periodical  survey  and 
valuation  {cadastre).  Since  it  is  a  tax  on  the  produce  of  the 
land  and  not  on  the  income  of  the  owner,  mortgage  debts  are 
not  deducted.  The  other  part  of  the  real  estate  tax  which 
falls  upon  buildings  is  assessed  accordirg  to  their  rental 
vaUie.  The  business  tax  is  designed  to  hit  the  profits  of  the 
business,  but  it  is  levied  only  according  to  outward  signs  or 
presumptions,  such  as  the  rent  paid  for  the  business  premises, 
the  number  of  clerks,  the  size  of  the  town,  etc.  The  door 
and  window  tax  is  imposed  on  all  openmgs  for  doors  or 
windows,  and  is  presumed  to  reach  the  ability  of  the  indi- 
vidual indirectly  in  three  ways :  hitting  in  some  cases  the 
owner  of  the  house,  in  others  the  occupant  of  the  dwelling, 
and  in  s«:ill  others  the  proprietors  of  the  business  conducted 
on  the  premises.  The  personal  and  personal  property  tax 
consists  of  two  elements :  The  first  {contribution  personnclle) 
is  a  kind  of  poll  tax,  fixed  originally  at  a  sum  equivalent  to 
three  days'  wages,  and  varying  since  1830  in  different  parts 
of  the  country,  from  one  and  a  half  to  four  and  a  half  francs. 
The  other  portion  of  the  tax,  on  movables  or  personal  property 
{contribution  inobilihr),  is  a  tax  on  house  rent  {loyer  d' habita- 
tion .iccording  to  the   vuleur  locative). 

These  were  the  original  four  taxes,  all  of  them,  as  is  seen, 
being  imposed  on  the  thing  rather  than  on  the  person.  With 
the  growth  of  corporate  wealth,  and  especially  with  the 
increased  fiscal  needs  of  the  govcniment  after  the  reverses 
of  1870,  the  system  of  taxes  on  product  was  rounded  out 
by  a  tax  on  securities  or  on  corporations  {inipot  sur  lesralcurs 
viobiliires).  This  tax  was  originally  imposed  in  1872  at  the 
rate  of  three  per  cent  on  the  interest,  dividends,  and  other 
income  of  corporations  and  associations,  and  is  advanced 
by  them,  being  deducted  from  the  sums  payable  to  the  secur- 
ity holders.  In  1890  the  rate  was  raised  to  four  percent. 
The  local  revenues  in  France,  finally,  are  raised  chiefly  by 
additions  {cciitimis  additionels)  to  the  four  taxes  on  product. 


The  Income  Tax  in  France 


275 


fi 


The  French  system  has  been  remarkably  successful  from 
several  points  of  view.  It  has  yielded  immense  revenues,  and 
it  has  been  attended  by  a  minimum  of  annoyance.  With  the 
lapse  of  time,  however,  the  defects  of  the  system  have  made 
themselves  more  and  more  apparent.  Above  all,  the  recent 
growth  of  large  fortunes  and  the  development  of  democracy 
have  conspired  to  set  the  inevitable  shortcomings  of  a  system 
of  taxes  on  product  into  greater  relief.  The  land  tax  was  from 
the  very  beginning  an  apportioneil,  not  a  percentage,  tax,  and 
the  methods  of  assessment  were  so  imperfect  that  the  pro- 
portionate amounts  paid  by  landholders  in  different  parts  of  the 
country  bore  less  and  less  relation  to  the  actual  yield  of  the  land. 
Attempts  at  the  equalization  {pcr^qmUioii)  of  the  land  tax  were 
frequently  made,  but  failed  in  France,  as  they  have  usually 
failed  in  the  United  States.  So  glaring  did  the  inequality 
become,  that  in  1890  the  building  part  of  the  real  estate  tax 
was  separated  from  the  land  tax  pro])er  and  was  made  a 
personal  tax  at  the  rate  of  3.2  per  cent  on  the  annual  rental 
value.  But  all  efforts  to  introduce  the  same  system  into  the 
land  tax  have  thus  far  failed,  and  the  land  tax,  with  the  cen- 
times additioncis,  has  been  a  crushing  burden  to  the  peasant 
and  the  small  farmer.  The  business  tax  has  become  honey- 
combed with  the  grossest  kind  of  inequalities,  the  presumed 
profits  of  many  classes  of  occupation  and  enterprise  standing 
in  very  slight  relation  to  the  actual  income.  The  door  and 
window  tax  has  been  universally  recognized  to  be  a  tax  on 
light  and  health,  inimical  to  the  best  interests  of  the  whole 
population.  The  personal  tax  is  open  to  all  the  objections  of 
a  poll  tax,  and  the  tax  on  movables  or  hou.se  rent  presses  with 
special  severity  on  the  poorer  classes.  Taking  it  all  in  all, 
the  French  system  of  taxes  on  product  which  responded  so 
admirably  to  the  needs  of  the  early  nineteenth  century,  has 
been  outgrown  through  the  development  of  the  last  hundred 
years. 

In  recent  years  the  jjressure  to  consider,  in  part  at  least, 
the  personal  conditions  of  the  taxpayer  has  been  so  strong 
as  to  lead  to  miner  changes  in  the  .system.     Thus,  in  the  land 


2  76 


The  Income   Tax 


tax,  the  law  of  1897  exempts  the  taxpayers  where  the  tax 
does  not  amount  to  more  than  ten  francs,  deducts  three 
quarters  of  the  tax  when  it  is  from  ten  to  fifteen  francs, 
one-half  of  the  tax  when  it  is  from  fifteen  to  twenty  francs,  and 
one-quarter  of  the  tax  when  it  is  from  twenty  to  twenty-five 
francs.  These  abatements  are  made  only  to  Frenchmen, 
and  under  the  double  condition  that  this  is  their  total  land 
tax,  and  that  their  liability  to  the  personal  property  tax  does 
not  exceed  twenty  francs.  In  1906  there  were  5,165,977 
such  abatements  amounting  to  14,854,167  francs.'  In  the 
business  tax  the  very  smallest  traders  and  the  petty  em- 
ployers are  now  exempt,  while,  on  the  contrary,  the  law  of 
1905  subjects  the  large  department  stores  to  a  special  addi- 
tional scale  of  taxation.'^  In  the  door  and  window  tax,  the 
existence  of  large  tenements  in  the  great  cities  led,  as  early 
as  1852 -1855,  to  the  permission,  in  the  case  of  Paris,  Lyons, 
and  Bordeaux,  to  grade  the  tax  according  to  the  rent  paid 
rather  than  according  to  the  number  of  doors  and  windows. 
Paris  and  Bordeaux  have  availed  themselves  of  this  privilege. 
Moreover,  since  1894,  model  workingmen's  tenements  are 
exempted  both  from  the  door  and  window  tax  and  from  the 
house  tax.^  In  the  case  of  the  personal  tax,  towns  having  an 
octroi  or  municipal  customs  duty,  are  permitted  to  substitute 
the  latter  for  the  former.  Finally,  in  the  case  of  the  pert.onal 
property  tax,  abatements  are  now  made  in  the  case  of  large 
families.  Thus  the  law  of  1890  entirely  exempts  parents  of 
seven  children  when  they  are  subject  to  a  tax  of  not  more 
than  ten  francs;  and  by  the  laws  of  1900-1904  special  abate- 
ments are  made  for  large  families  in  the  case  of  taxpayers 
who  pay  very  small  house  rents.'* 

These  concessions  to  a  growing  sentiment  have  not  been 
adequate,  however,  and  with  the  grf  .th  of  tho  democratic 
movement  there  has  been  a  strongly  marked  tendency  toward 

'  Je/e,  (ours  l.limiiiliiire  Je  Siieme  Jes  /'inantfs,  ]>.  752. 
^  Jtv.e,  ()/.  ,1/.,  PI).  795,  Soo.  '  Jtve,  of'.  ,i/.,  p.  S20. 

*  For  iletails  uf  tlii<  system,  see  Seligman,  Progreai-.e  TaMiticn,  2.1  ed.,  1908, 
p.  88.      Cr  also  Je^t,  «/.  at.,  p.  826. 


■■?!  il 


The  Income  Tax  in  France 


277 


the  abolition  of  the  entire  system  of  taxes  on  product,  and  its 
replacement  in  whole  or  in  part  by  the  taxation  of  income. 
Beginning  with  the  revolution  of  1848  and  resumed  after  the 
creation  of  the  Third  Republic,  these  efforts  have  become 
more  and  more  insistent,  until  they  culminated,  in  1909,  in  the 
passage  by  the  Chamber  of  Deputies  of  an  income  tax  bill. 
A  review  of  this  half  century  of  struggle  will  be  found  instruc- 
tive from  many  points  of  view.' 

'  In  Htuschling,  I' Impbt  siir  U  Revenii,  lirussels,  1873  (a  later  eilition  of  a 
book  originally  published  in  1848),  will  be  found  a  short  account  of  the  income 
tax  projects  up  to  that  date.  Joseph  Chailley,  I'lmpot  sur  le  Reienu.  IJgisia- 
lion  Comparce  el  ^.conomie  Politique.  Paris,  1S84,  pp.  48J-619,  contains  a  full 
and  interesting  account  of  the  period  from  1S48  to  1883  inclusive.  In  I.' /mpot 
sur  le  A'evenu,  by  Vves  Guyot,  I'aris,  1887,  which  is  a  reprint  of  an  official  report, 
will  be  found  a  short  treatment  of  the  projects  from  1871  to  18S7.  A  complete 
enumeration  of  all  the  bills  introduced  from  1871  to  l8y6  is  contained  in  the 
Rapport  fait  mi  nom  Je  li  (.oinmiiuon  du  tUidget  {Impot  Giniral  sur  le  Reienu), 
by  M.  I'aul  Dclombre,  C'hamlire  des  Deputes,  Session  de  1896,  no.  1831,  pp.  53- 
54.  A  chronological  list  of  all  the  income  tax  projects  from  1848  to  1907,  with  a 
summary  of  each  and  an  analysis  of  the  more  important,  will  be  founil  in  /' /mpot 
sur  h  Rerenu,  l.ssai  J' Economie  /ininfiere,  by  (Jaston-CJros.  Paris,  1907, 
pp.  423-472  and  511-530.  A  someuhat  shorter  list  and  a  description  of  all  the 
income  tax  projects  from  184S  to  1910  will  be  found  in  /.'/mpot  sur  /e  Re: enu,  l>y 
Just  Ilaristoy.  Paris,  1910,  annexes  ii,  pp.  S02- S35.  I  he  fullest  account  of  all 
the  bills  and  projects  is  contained  in  the  official  Rapport  fait  ,iu  nom  li,-  la  Com- 
mission Je  la  /.ogislation  r'iscale  chargie  ,1'examiner  /,■  /'roj.t  ot  les  /'ropositions 
de  / oi  tendant  i>  t /itahlissemeiit  d'uii  /mpot  Giniral  sur  le  Rejtiiu.  Par  M.  Kene 
Renoult,  t'hanibre  des  Ileputes,  Session  ile  1907,  no.  1053,  vol.  ii,  annexe  i, 
pp.  5-87.  :\n  elaborate  description  of  the  discussion  on  cnch  of  the  projects 
up  to  189S  will  be  found  in  /e  /''rohlime  Fiscal — de  /'/mpot  sur  le  Rerenu, 
by  Charles  Philippe,  6th  ed.,  1898  (the  first  edition  was  published  in  1894), 
pp.  37-311.  Kor  the  period  suosequent  to  11^3,  full  details  of  all  the  schemes 
are  published  in  the  current  nuniliers  of  the  /\e:  m  de  Stittue  et  de  /./gislation 
Financiere.  .\  short  analysis  of  the  most  important  Liter  projects  will  be  found 
in  l.l'ments  de  Soieiire  /'innioiere,  by  Boucard  et  Jcve,  V(d.  li  (I906),  pp.  gil 
et  seif.  —  All  these  books  will  hereafter  be  referred  to  simply  by  quoting  the  nanie 
of  the  author. 

A  German  treatment  of  the  subject  is  Pie  Finkommen^teuerproiede  in  Frank- 
reich  l-is  i8Sy,  by  Hermann  Meyer,  ISerlni,  n/is,  aud  a  later  study  l)y  the  same 
author,  "Kin  l.'eberblick  iil-er  die  fran/nsisi  h.n  I'.inki  nnm  nsteucr-projecte 
in  Krankreich  bis  1887,  nach  .\nnahme  der  Resolution  vom  10  Febr.  1887,"  in 
Finanz  .Irilii:,  v.d.  32  (1906),  pn.  13-41.  A  very  short  account  in  Knglish 
will  be  f.'iin.l  in  nn  article  by  H.  Parker  Willis,  "Income  Taxation  in  France,' 
Journal vf  l^oliti.al  /uonomy,  vol.  4  (1896),  pp.  37-5J. 


aBa^'ssjj^-^''T 


278 


TJie  Income  Tax 


§  2.   The  Revolution  of  1848 

The  earlier  history  of  the  income  tax  projects  in  France 
is  well  summed  up  by  a  French  writer  in  the  statement  that 
"  The  Revolution  did  not  want  to  establish  it,  and  the  govern- 
ments which  succeeded  either  would  not  or  could  not."  '  It 
was  the  Revolution  of  1848  that  brought  the  income  tax 
scheme  to  the  front.  As  a  result  of  the  financial  crisis  of 
1847-1848  the  provisional  government,  confronted  by  the 
necessity  of  extraordinary  expenditure,  found  itself  face  to 
face  with  a  large  deficit.  M.  Gamier  Pag^s,  the  Minister  of 
Finance,  proposed  to  make  good  the  deficit  by  selling  the 
crown  jewels,  by  disposing  of  some  of  the  national  forests, 
by  increasing  the  rate  of  the  existing  taxes,  and  by  a  patriotic 
loan.  But  at  the  last  moment  his  courage  failed  him,  and  the 
plan  was  not  carried  through.  It  was  then  that  he  suggested 
the  possibility  of  an  income  tax,  pointing  to  the  experience  of 
England.  On  March  16  he  stated:  "I  should  have  liked  to 
submit  to  your  approval  the  plan  of  an  income  tax.  Just  in 
principle,  more  just  than  all  the  others,  the  income  tax  pos- 
sesses, in  addition,  the  advantage  that  it  can  be  easily  col- 
lected."'' But  he  confessed  that  it  would  take  too  long  to 
prepare  such  a  measure,  and  abandoned  the  project  for  the 
moment.  On  May  8,  however,  he  came  back  to  the  subject 
and  said:  "Of  all  taxes  the  most  just,  the  most  efficacious, 
the  one  which  I  shall  endeavor  with  all  the  power  of  a  deep- 
seated  conviction  to  have  you  accept,  is  the  progressive  income 
tax.  You  citizens  will  have  in  the  eyes  of  posterity  the  eter- 
nal glory  of  having  established  it  d  ,,  •"'■ively  in  a  France  that 
has  become  republican  and  demov.  '^ 

The  radicals  in  the  Assembly  could  not  let  such  a  sugges- 
tion pass.  The  country  was  being  flooded  with  a  mass  of 
pamphlets  and  more  serious  projects,  suggesting  more  or  less 

'  "  La  Revolution  n'a  pas  voulu  I'etablir,  les  Gouverncments  (jui  I'ont  suivic  ne 
I'ont  pas  voulu  i>u  ne  I'ont  jias  pu."  —  Chailley,  p.  483. 
'  Philippe,  p.  50;   and  Chailley,  p.  485. 
•  /f  Xliuiii.ni-  riifTfy^tK  no,   I  JO,  Mav  9i  l8.)8,  p,  981,      ("f,  I'liilinne,  n.  CI. 


'IJ. 


The  Income   Tax  in  France 


279 


extreme  methods  of  taxing  the  rich.  Passing  over  the  merely 
socialistic  pamphlets,  it  may  suffice  to  call  attention  to  the 
works  of  Hcbert,  Lefebvre,  Guigard,  and  Nabos,  the  last 
writer  advocating  a  single  tax  on  incomes.^  On  the  other 
hand,  a  single  tax  on  property  rather  than  on  income  was 
enthusiastically  supported  by  Girardin,  who  based  his  project 
on  the  insurance  theory  of  the  state.'^ 

The  radical  party  was  represented  in  the  legislature  by 
Barbes  and  Proudhon.  Harb^s  proposed,  amid  almost  uni- 
versal stupefaction,  as  we  are  told,  a  tax  of  one  thousand 
million  francs  to  be  assessed  exclusively  on  the  rich.  Proud- 
hon, in  order  to  secure  the  large  funds  required  for  his 
scheme  of  People's  Banks,  suggested  an  income  tax,  going 
as  high  as  33 i  per  cent  on  some  incomes  and  even  reaching 
50  per  cent  on  others. ^  Such  propositions,  however,  were 
entirely  too  extreme,  and  after  a  report  by  Thiers,*  they 
were  incontinently  turned  down  by  the  legislature,  which 
declared  that  they  savored  of  revolution.  The  same  fate 
befell  the  project  of  Joseph  Lcmpereur,  who  had  suggested 
a  ten-per-cent  income  tax.'' 

That  the  sentiment  of  the  time  was  not  wholly  unfavorable 

1  De  TImpot  sur  Its  Crhmces  Hypothicairet  ,ie  C Income  Tax  ou  Impot  Pro- 
gressif  admis  en  Principe  par  U  Citoyen  Carnur  P„^rs,  Minntre  Jes  Finances, 
etc.  I'ar  J.  I!.  Hebert,  N'utaire  Honorairc.  I'aris,  1S4.S;  De  rimpot  stir  le  h'e- 
vcnu  Mo  <  -lie.-  etc.  Tar  Thibault  Lefebvre,  Avocat.  Paris,  1849  ;  Oe  rimpH  sur 
le  Peven.  le  Capital,  la  Propriitc,  rfmitutne,  Ic  Commerce,  etc.  Par  J.-.\.  llui- 
gar.l.  r  -is,  1850  ;  Impdt  Unique  et  Proporlioiiiiel  sur  le  Pevenu.  A  Messieurs 
les  Mem/  's  de  P Asseml'lce  Xalionale.  Par  Henri  Nabos,  Maire  de  la  Ville  <le 
Marciac.     Auch,  1851. 

2  le  Socialisme  et  r Impot.  Par  Kmlle  ,1e  Cirar.lin.  Paris,  1S49.  The  scheme 
is  repeated  in  the  same  author's  I'lmp,!,  VmU,  1S52.  an.l  was  reprinted  two 
decades  later,  in  1872,  under  the  title,  I.' Impel  Ini./ue  el  P Impot  Unique. 

3  Proposition  relative  a  Tlmp^t  sur  Ic  Pcrcnn  pr:^ent:e  le  n  Juillet  ,S4S,par 
>e  Citoveii  ProuMon.     I!y  Pierre  Joseph  Proulhon.     Paris,  184S. 

«  "Kapport  du  Citoven  Thiers,  fait  an  nom  du  Tomitc  des  Finances  sur  la 
Proposition  du  Cit.  Proudhon,  le  26  Juillet.  1848."-  /■•  .Von, tew.  p.  1S31.  This 
report,  together  with  the  scheme  and  the  speech  of  Proudhon,  was  piiblishe.l  in 
a  volume  entitled  Papport  Ju  Citoven  Thiers,  prcc:dc  de  la  Proposition  du  (  itoyen 
Proudhon  relative  a  I' Impdt  sur  le  Pevenu  et  suiii  de  son  Discours  prononcc  a 
r  isse,,:Hce  Xationale  le  3;  Juillet,  .'S^S.    faris.  1848.  '  ( Y-  Renault,  p.  7. 


28o 


The  Income  Tax 


to  the  income  \zl.\  scheme  is  shown  by  the  fact  that  Thiers 
himself,  who  was  subsequently  to  prove  so  implacable  an 
enemy  to  the  project,  now  declared  himself  as  by  no  means 
indisposed  to  accept  the  principle.  When  the  government 
a  little  later  presented  a  plan  for  a  tax  on  mortgages,  Thiers, 
who  had  been  named  head  of  the  committee  to  which  the 
proposition  was  referred,  counselled  its  rejection,  saying,  on 
August  2 :  "If  the  project  had  been  one  for  an  income  tax, 
we  should  have  examined  it,  without,  indeed,  binding  our- 
selves. .  .  .  Among  all  the  taxes  that  have  been  suggested 
the  income  tax  is  the  one  which  deserves  to  be  the  most 
seriously  examined,  and  even  tried.  When  the  government 
brings  in  such  a  plan  I  shall  discuss  it  in  good  faith,  for  it 
merits  serious  consideration."  ^  He  went  on  to  state  that 
the  income  tax  was  not  an  arbitrary  thing  {une  chose  arbi- 
(rain),  but  that  although  the  English  tax  had  been  received 
with  disfavor  and  had  been  frowned  upon,  yet  the  good  sense 
of  England  had  finally  accepted  it  as  necessary.* 

Following  the  good  advice  here  given  to  the  government, 
the  new  Minister  of  Finance,  Goudchaux,  submitted  on  Au- 
gust 23  the  draft  of  an  income  tax,  which  was,  however,  to 
be  levied  only  on  the  income  from  per.sonal  property,  and 
which  was  designed  to  raise  sixty  million  francs.  The 
scheme  was  referred  to  a  committee  of  which  Parieu  was 
chairman,  and  which  brought  in  an  adverse  report,  basing 
its  opposition  chiefly  on  the  ground  of  the  inquisitorial  char- 
acter of  the  tax.^     Every  one,  sai''  the  committee,  approved 

'  ".Si  c'etait  un  imi>rit  sur  le  revenu  qu'on  ettt  la  pretention  de  nous  apporter, 
nous  I'cxaminerions  sans  tnutefois  nous  engager.  Car  sous  un  gouvernement 
nouveau  tout  impot  nouvcau  a  ile  grandcs  (iittkuUes  et  celui-1.1  en  pr6sente  de 
singulitrcment  grandes.  (Vpcndant  j'ai  declare  devant  le  comite  des  finances 
que  jiarmi  tous  les  impots  nouveaux,  c'etait  celui  que  meritait  d'etre  le  plus  se- 
rieusement  examiri  J  ct  mOme  essaye.  Lorsqu'il  sera  apporte  ici,  pour  ma  part  je 
le  discuterai  en  toute  bonne  foi,  car  je  reconnais  que  c'est  un  impot  qui  merite 
d'Stre  pris  en  serieuso  consideration."  —  Philippe,  p.  52;    Chailley,  pp.  4S7-488. 

2  Cf.  the  notes  on  tliis  speech  by  Wolowski  in  1872,  on  pp.  xxxv-xxxvi  of  the 
book  mentioned  below  on  page  285. 

'  The  <lraft  will  be  f.nmd  in  Chailley,  pp.  489-400.  11  is  also  discussed  in 
Guyot,  pp.  19  et  se,j. ;  in  ( laston-C.ros,  p.  51 1  ;   and  in  I'hilippe,  pp.  5,5-55. 


The  Income   Tax  in  France 


281 


of  the  principle  of  the  tax ;  but  in  Paricu's  words :  "  What 
a  frightful  inquisition  is  that  of  which  the  result  will  be  to 
compel  a  rich  man  to  roveal  a  fortune  which  it  perhaps 
pleases  him  to  surround  with  mystery,  and  to  condemn  the 
financially  unfortunate  citizen  to  choose  between  the  hard 
alternative  of  throwing  on  his  situation  a  light  fatal  to  his 
credit,  or  of  purchasing  by  a  mendacious  tax  the  preserva- 
tion of  the  prestige  of  comfort  by  which  he  is  still  sur- 
rounded." '  Goudchaux's  project  was  also  savagely  attacked 
by  the  noted  economist  and  former  Minister  of  the  Interior, 
Leon  Kaucher,  who  declared  that  the  income  tax  would  nec- 
essarily lead  to  a  progressive  tax,  which  was  to  him  the  climax 
of  absurdity.  "  Blind  is  he  who  does  not  see  it ;  bereft  of 
sense  is  he  who  dissembles  it."  "^ 

As  a  result  of  this  unfavorable  report,  Goudchaux  resigned 
and  was  succeeded  by  the  well-known  economist  and  states- 
man, Hippolytc  Passy.  Passy,  however,  made  another  at- 
tempt, on  slightly  different  lines,  with  a  scheme  resting  on  a 
self-declaration  of  income.^  But  scarcely  had  the  project 
been  introduced  when  Passy  was  for  other  reasons  forced  to 
resign,  and  was  succeeded  by  M.  Fould,  an  inveterate  oppo- 
nent of  the  tax.  Fould  stated,  on  November  14,  1849,  in 
withdrawing  Passy's  project,  that  "  this  tax,  the  last  resource 
of  hard-pressed  governments,  is  in  its  nature  arbitrary  and 
inquisitorial.  The  general  discontent  which  would  result 
from  its  application   would  soon  lead  to  a  lamentable  loss 

J  "Quelle  inquisition  redoutable  que  celU-  dont  le  resultat  sera  tl'obliger  le 
riche  a"  reveler  une  fortune  qu'il  se  platt  peut-etr.-  a  cntourer  <le  raystJre,  et 
de  condamncr  le  citoven  pccuniairemcnt  mallieureux  .1  cctte  dure  alternative 
de  repandre  sur  sa  situation  une  lumi^re  fatak'  h  son  credit,  ou  d'acheter  par 
un  impAt  mensonger  la  conser^-ation  du  prestige  d'aisance  dont  il  est  encore 
environne."  — Chaillcy,  p.  492. 

■■»  "Oui,  I'impfit  progressif  est  au  bout  de  I'impot  sur  le  revcnu.  11  en  repre- 
sente  la  fatalite.  Aveugle  qui  nc  la  voit  pas,  et  insense  qui  la  dissimule."  —  De 
rrmpM  ■:ur  If  Kfvenu.  Tar  M.  I.enn  lauchcr.  Paris,  1840.  p.  .55-  Thi^  «as 
a  reprint  with  some  additions  of  an  arti.  le  that  appeared  in  the  Revuf  Jet  Dnix 
Mondn  for  October,  1849.     See  also  a  similar  article  by  .\.  O.chut  in  the  same 

volume. 

:!  pj,t5...v    jraft  vviU  he  f;!und  in  Chaillev,  pp    1Qf>-4'J7- 


*  W 


\\ 


L  jWWriT'WWmt^r^'L.^i  tm  ~ 


282 


The  Income  Tax 


through  the  concealment  and  emigration  of  capital,  and  through 
a  reduction  of  individual  expenses  which  would  soon  reach 
the  public  revenues." ' 

Not'iing  daunted,  however,  the  partisans  of  the  tax  con- 
tinued their  efforts.  Passy  declared  on  the  floor  of  the  House: 
"  Sooner  or  later  you  will  be  compelled  to  do  in  France  what 
has  been  done  in  England."  Various  bills  were  introduced 
by  deputies  Febvrel,  Adelswaerd,  Lamarque,  Laurent,  and 
De  Veauce;''^  but  they  all  mot  the  unrelenting  opposition 
of  Minister  Fould,  and  although  there  was  a  lively  discussion 
of  the  projects  in  the  chief  economic  journals,^  it  was,  as  one  of 
the  French  writers  puts  it,  "  the  swan  song.  The  ignorance, 
the  bad  faith,  the  preoccupations  of  a  government  whose  very 
origin  compelled  it  to  handle  gingerly  certain  classes  of  tax- 
payers, finally  the  awkward  exaggerations  of  the  partisans  of 
the  tax,  all  contributed  to  lead  public  opinion  astray,  and  to 
bring  about  for  a  long  time  a  policy  of  silence  on  this  delicate 
question."* 

With  the  advent  of  the  Second  Empire  the  movement 
for  reform  died  out,  and  the  policy  of  silence  to  which  we 
have  just  referred  was  inaugurated.  Even  in  scientific 
circles,  with  the  gradual  dominance  of  the  so-called  liberal 
school,  devoted  to  laissez  /aire  and  free  trade,  whatever 
prepossessions  may  have  existed  in  favor  of  the  income  tax 
gradually  disappeared.  Only  one  important  writer,  Parieu, 
the  opponent  of  the  scheme  under  the  republican  govern- 

'  "Cet  impot,  ressource  extrC-me  iles  gouvernements  oberes,  est,  <le  sa  nature, 
arbitraire  et  iiKiuisiturial.  .  .  .  I^'inquit-tuilL'  genC-rale,  resultant  de  sa  mise  en 
pratiiiue,  amtnerait  bientot  une  facheuse  cumpt'nsation  par  la  dissimulation  et 
rcmigration  des  capitaux,  ct  jiar  une  reduction  dcs  depenses  des  particuliers  qui 
atteinilrait  les  revenus  i)ublics."  —  C'hailley,  p.  498. 

-  l-'or  these  proposals, see  riaston-Gros,  p.  312;    Kenault,  pp.  8-9. 

•'  See  esp.  the  article  by  Joseph  ("larnier,  in  the  Journal  iles  f'.ionomistes,  June, 
1851.     Also  the  article  by  Passy  in  the  same  journal,  June,  1852. 

*  "Ce  fut  Ic  chant  de  cygne.  L'ii^norance,  la  niauvaise  foi,  les  preoccupations 
d'un  (iouvernement  a  qui  son  origine  imposait  le  menagement  de  certains  con- 
tribuables,  enlin  les  exageratioiis  maladroites  des  p.-irtisans  de  cet  impot,  tout 
contribua  a  egarer  I'opinion  pul)li(|ue  et  a  organiser  pendant  longtemps  le  silence 
sur  cette  question  delicate."  —  ("haillev.  n.  coo. 


The  Income  Tax  in  France 


283 


ment,  devoted  any  attention  at  all  to  the  subject,  and  he  re- 
turned to  it  repeatedly.'  The  entire  project  of  fiscal  reform 
slumbered. 

§  3.    The  Fratuo-Prussian   War 

The  next  outbreak  of  reformatory  activity  was  due  to 
the  Franco-Prussian  War.  In  fact,  even  shortly  before  the 
downfall  of  the  Empire  the  unfavorable  fiscal  outlook  in 
1870  had  led  two  deputies,  Larouche-Joubert  and  Haentjen, 
to  propose  income-tax  bills.  The  first  one  was  a  rather 
fantastic  scheme  recommending  a  general  income  tax  and 
calling  upon  all  the  citizens  to  declare  their  income,  without 
any  supervision  on  the  part  of  the  administration.  The  only 
control,  we  are  told,  was  the  conscience  of  the  individual  and 
the  only  sanction,  his  remorse.  The  other  proposition  was  a 
little  more  serious ;  but  both,  although  leading  to  some  dis- 
cussion, met  with  the  opposition  of  the  Minister  of  Finance, 
Segris,  and  came  to  naught.* 

The  unfortunate  outcome  of  the  war,  however,  and  the 
imperious  necessity  of  raising  the  five  milliards,  necessarily 
brought  up  the  entire  question  of  tax  reform.  Numerous 
pamphlets  appeared  on  the  subject,  and  when  the  national 
assembly  met  at  Bordeaux  at  the  opening  of  1871  it  was  at 
once  flooded  with  all  sorts  of  projects.     Some,  like  Tellier,-' 

'  Esquirou  de  Parieu,  "  Examcn  ilcs  .\vantagt<  ct  ilcs  Inconvunients  des 
Impots  (jeneraux  sur  la  Propriete  ou  le  Kcvcnu  "  iti  the  Joitiiuil  </<■>  E  cone  mi  sits, 
June,  1857,  and  in  his  great  work.  Trail'  ties  Imf''>ls  .■'iisi.i.'r.'s  sous  le  KapfoH 
J/islorii/n,\  fiAonomiijue  el  l'olili<iuf.     Paris,  1S62.     2d  fd.,  l86(>.  4  vols. 

(■/.■  also  the  articles  by  De  CJour^as,  "  De  I'lnipot  sur  le  Revenu  ''  in  Journrl 
dfs  luonoiniste:  for  185S  ;  and  liy  II.  liauilrillart,  "  I.'Impot  sur  le  Capital  et 
rimpot  sur  le  Revenu."  —  //;./.,  1866. 

2  For  the  two  propositions,  see  Caston-Cros,  p.  512;  Philippe,  p.  58;  Chailley, 
pp.  503-504. 

^TtUicr  had  suggesteil  this  scheme  cvrn  before  the  disaster,  and  now  repeated 
it.  (y.  his  three  monographs:  f: /mpol  I'ni^/ne  el  ses  Coiis.'iiuriues.  Paris,  1868; 
i:impot  Unique  et  l' Invasion  de  1S70:  la  I ih: ration  par  rimpdt  /'loforlionnJ 
sur  les  Faclures.  Avec  I'roiet  de  l.oi  et  Coninientairei  a  r.tppui.  Paris,  1872. 
Fifteen  years  later  the  same  scheme  «:is  reintroduceil  by  .\lfred  Lochopie  in  a 
work  entitled,  V Impot  Unique  el  Indirect  sur  le  Keventi  far  la  Taxe  Proportion- 
nelle  i:tr  !r:   QuiHait:::.      P.tiis,   !8S6. 


\\ 


I 


I 
^1 


284 


The  Income   Tax 


\    I 


sUKKCstcd   a   single    tax   on   receipts.      Others    like   Count 
Brani<;ki  proposed  a  single  tax  on  property.'     Hut  the  great 
bulk  of  the  projects  were  in  favor  of  an  income  tax,  some 
with  a  purely  fiscal  motive,  some  designed  to  introduce  more 
eipiity  into  the  revenue  system,  and  some  inspired  by  a  radical 
opposition  to  wealth  in  general."''     Perhaps  the  most  weighty 
production  was  that  of  Jules  Siegfried,  who  was  subsequently 
to  play  a  leading  part  in  the  French  government,  and  who 
now  made  a  well-balanced  and  strong  defence  of  the  income 
tax  based  on  Knglish   models.      "  We  now  have  an  oppor- 
tunity," said  he,  "  of  introducing  into  our  customs  an  income 
tax.     Let  us  not  let  it  escape." »     The  early  bills  of  Flotard,* 
Hevre.  and   Bamberger  had  primarily  a  fiscal  object  in  view. 
But  the  government  showed  itself  ill-disposed  to  the  scheme, 
and  proposed  to  raise  the  necessary  revenue  from  the  customs 
duties.     M.  I.arcy,  the  Minister  of  Public  Works,  said  in  his 
speech  of  June  20,  1871,  "The  income  tax  — it  is  the  glory 
of  the  budget  that  we  have  none."     And  Thiers  now  arose, 
declaring  in  brief  terms  his  opposition  to  "  this  deplorable 
tax,  this  tax  of  discord,  which  is  nothing  but  the  taille  of  the 
ancient  regime."'''     He  conceded  that  the  tax  was  popular, 
but  he  warned  the  Assembly  that  he  would  not  flatter  popular 
passions,   and  that   i^e   would    resign  from   the  government 
rather  than  consent  to  the  tax. 


liti- 


KEt 


»  i:imp6t  sur  It  Ca/'iAii  IMiratair  de  l,i  Contribution  tie  Gutrrt.  Moycnt 
pratiques  di  I'appliqucr.     I'ar  le  Cuunl  Zaviir  l!ranii,ki.     Paris,  1871. 

■i  Cf.  i:iiiifdt  Unique  repriientatif  el  posse^sif  appliqu'  ft  control:  par  U 
Suffrage  ini-.enel.  ITar  .\,lclante.]  Havre,  1S70  ;  I.'fmfot  sur  le  Kevenu. 
Deliuranu  du  Terntoire.  1S71  ;  Ctotanl.  I.Wmpit  >ur  !,■  Ka.nu,  son  Ot'jet  tt 
sa  /.\ishition  dans  irs  /•,;.>  qu,  ron'  .id,  ft.-.  1 87 1  ;  Cn  Svsthiie  I'rntique  d'  Imfiot 
sur  le  A'evenu.  1872  ;  /'f  /: /mpdt  et  de  /</  /'rodu.iion.  1  ettrt  .i  Messieurs  les 
Dipiit's  a  r.tssrniH;-  XUion.i/,:     Par  un  Imhistriel,  1S71. 

3  /:/mpdt  sur  te  Kevniu  et  les  Droits  de  Douane.  Tar  Jules  SicKfrie<l. 
[Havre,  1X71],  y.  28.  The  same  idea  is  bruachol,  altliough  not  so  fully  elabo- 
rated, in  his  earlier  work  of  the  same  year,  entitled,  Situatt,n  I-inanaere  de  la 

irance. 

*  For  these,  see  Caston-liros,  p.  513,  and  t  hailley,  pp.  508-509. 

'■>  "Tet  impot  deplorable,  tet  impot  de  discorde,  <|ui  t'tait  tout  simplement  la 
taille  de  I'ancion  regitne,  et  la  laiiie  eu  teuipa  <ie  kevoiulion. 


The  Income   Tax  in  France 


285 


I  lis  opposition,  however,  only  served  to  fan  the  Hatnes,  and 
new  income  tax  bills  were  now  introduced  almost  by  the  score. 
Amonj;  them  were  the  i)rojects  of  Louis  Passy  and  Houssard, 
Rouveure,  Flotard,  Amat,  I.anglois,  and  KoUiet,'  all  of  them 
except  the  first  beini;  propositions  which,  as  Chaillcy  remarks, 
"  while  the  product  of  a  {generous  patriotism,  clearly  showed 
either  their  lack  of  experience,  economic  i^Miorance,  or  danger- 
ous tendencies  toward  the  cniploynicnt  of  strictly  revolutionary 
methods."  All  the  bills  were  referred  to  the  Hud^'ot  Com 
mission  which,  under  the  presidency  of  Casimir  Ferier,  worked 
out  a  carefully  elaborated  scheme  largely  on  English  models, 
and  by  a  vote  of  sixteen  to  eight  decided  to  report  the  bill  to 
the  Assembly.'^ 

In  the  interval,  however,  two  other  bills  had  been  introduced, 
one  by  the  socialist  Langlois,  and  another,  based  even  more 
largely  on  the  English  scheme,  by  the  well-known  bimctallist 
VVolowski.  A  general  discussion  "^  now  ensued,  in  December, 
marked  on  the  part  of  most  of  the  opposition  speeches  by  all 
kinds  of  errors  and  misstatements,  resting  evidently  upon 
ignorance  of  facts.*      The  temper  of  the  Assembly  seemed, 

>  The  pr>iect  of  Passy  and  Iluussar.l  was  f.-r  a  tax  only  on  non-cummiTcial  in- 
comes from  personal  property;  that  of  Rouveure-  was  hasc.l  upon  the  l.nKhsh 
income  tax  ;  that  of  .\nial  »as  for  a  tax  on  capit.il  ;  that  of  Langlois  was  a  war 
tax  of  twentv-tivc  per  cent  or.  all  incomes  for  three  years ;  that  of  KoUiet  was 
similar  to  Passy's.     See  (laslon-Oros.  pp.  SIJ-SU.  ."i"'!  <  hailley,  pp.  5n-5'5. 

■-'  Rapport  f.nt  ail  nom  ,/e  la  Commusion  siir  It  IU<.i^,'l  redtfi  ./<■  rixerast 
1871.     I'resente  p?r  Casimir  I'erier.      Cf.  I'hilippe,  pp.  63-64  i    (  haiUey,  pp.  518- 

1  Cf.  Philippe,  pp.  64-69. 

«  Wolowski  called  attention  to  some  of  these,  especially  with  reference  to  the 
experience  of  the  income  lax  in  the  fnitcl  States.  Mis  treatment  of  the  .Ameri- 
can incom.-  tax  occupies  no  less  than  twentv-tuopa-es  in  the  Look  whuh  con- 
tains a  reprint  of  his  speech  and  of  the  eiisuin«  discussion.  See  /.Vw/J/  su,  U 
lievenu.  Di^couy,  ,.V  M.  Wohu^ki  (S.\,n,ts  ./«  .'J  el  .7  n:.einh:,  iSyi)  avfc 
J,s  Ohfnation.  et  Ja  Auiu-xti  .ur  Vlmpit  ./«  Keienu  a:,x  Elan-Vins  it  en 
Ani^Utare.  Paris,  1S72,  pp.  viii-xxx.  WoluwsUi  quotes  an  i.itereslinn  personal 
letter  from  the  .American  economist,  Amasa  Walker,  reading  as  follows  :  "  1  hope 
that  vour  government  will  adopt  the  income  tax  as  a  permanent  part  of  the  hsca 
system.  No  tax  couhl  l-e  more  rational  or  more  ju-l.  Will,  us,  it  is  to  he  feared 
that  the  tax  will  l,e  aholished  hecause  the  great  capinlists  are  waging  a  Inltc  war 


it 
-1 


386 


Tlu  Income  Tax 


however,  to  be  not  unfavorable  to  the  project,  and  even  the 
leading  Chambers  of  Commerce  throughout  the  country  stated 
that  they  preferred  an  income  tax  to  the  import  duties  on  "-aw 
materials,  which  had  been  suggested  as  a  substitute  by  the  gov- 
ernment.' On  December  26,  1H71,  however,  Thiers,  the  head 
of  the  provisional  government,  arose  and  in  a  memorable 
speech  completely  changed  the  temper  of  the  Assembly  and 
crushed  his  adversaries. 

Thiers  had  by  this  time  entirely  altered  his  views.  It  ./ill 
be  remembered  that  in  1848  he  was  not  unfavorable  to  the 
income  tax,  and  in  his  book  published  at  about  that  time  he 
took  very  much  the  same  attitude.*  So  well  '  nown  were  his 
opinions  that  in  1862  he  was  even  cited,  by  a  member  of  the 
Assembly,  Granier  de  Cassagnac,  as  an  avowed  partisan  of 
the  income  tax.  His  attitude,  now,  however,  was  very  differ- 
ent. He  called  the  tax  a  tax  of  discord  and  of  disguised 
socialism,  and  a  weapon  of  tyranny  in  the  hands  of  political 
parties.  He  attempted  to  show  that  the  conditions  of  France 
were  very  different  from  those  of  Kngland,  where  the  income 
tax  might  be  to  a  certain  extent  endurable,  and  he  did  not 
tire  of  emphasizing  ihi-  immediate  dangers  of  arbitrariness 
and  inquisitorial  conduct  on  the  part  of  the  faction  in  power 
in  France.  In  an  cl(i(|iiciit  peroration  he  conjured  the  As- 
sembly not  to  imitate  the  despotic  power  which  flatters  the 
masses  by  deceivint^  them.'' 

Perhaps  in  th.  conditions  of  the  time  Thiers'  opposition 
was  not  out  of  place.     The  political  situation  was  unstable,  a 


on  it,  and  they  exercise  a  powerful  influence  in  the  legislative  counsels.  If  they 
should  succeed,  it  woulil  ije  a  great  injustice  to  the  lalioring  cla.sses." —  Of.  cit,, 
p.  xxxiii. 

'  These  views  are  well  represented  in  De  t'  'mf>dl  el  Je  la  I'voJuition,  Litlre  a 
Messieurs  les  l>' (•itlh  i)  l' .hst-inhlre  Xa/ion,i/e.  Par  un  Industriel.  The  authoi 
advocates  a  property  tax  in  preference  to  taxes  <in  production. 

^  Thiers,  Pe  t,i  /'ropri,'/,'-.     Paris,  1848,  pp.  34S-J65. 

'  Disioiii  s  tontre  1'  r.liihlissement  J'  un  /»,/''  sur  le  Rerenu.  P'otioiu'  pfir  M. 
Thiers  !e  J6  /ieiemhre,  iSyi,  ,;  I'AssembUe  Xalionale.  This  was  reprinted  several 
times,  the  latest  reprint  being  in  !-S')6.  Tiie  speech  will  also  be  found  in  full  in 
Philippe,  pp.  6S-90. 


The  Income   Tax  in  France 


287 


bitter  contest  between  the  various  factions  was  already  in 
sight,  and  the  country  needed  the  full  sympathy  of  the  corr- 
mercial  and  financial  classes  in  order  to  extricate  itself  from 
its  unfortunate  plight.  However  that  may  be,  Thiers  suc- 
ceeded quite  as  completely  as  did  Gladstone  in  1853  in  win- 
ning over  a  hostile  jiarliament.  After  his  great  speech,  the 
income  tax  had  no  further  i  hance.  It  is  true  that  even  after 
Wolowski's  bill  was  defeated,  new  projects  were  presented  in 
January,  1872,  one  by  Hevre  ami  Hamborger,'  who  reintro- 
duced their  old  scheme  of  a  progressive  tax  on  all  incomes, 
and  one  by  Wolowski,  who  now  proposed  a  simple  house- 
rental  tax  of  fifteen  per  cent.'  Hut  the  matter  had  been 
settled  and  the  attempt  of  several  writers  to  turn  the  discus- 
sion in  the  direction  of  an  income  tax  based  on  house  rents 
met  with  no  success.^ 

The  movement,  however,  could  not  bt  ntirely  stifled.  In 
1874  two  more  projects  were  introduced,  one  by  Messrs.  Aubry, 
Jozon,  Defournelle,  and  Courcclic,  based  on  a  system  of  out- 
ward signs,  chiefly  house  rents,*  and  one  by  Rouvior,  of  whom 
we  shall  hear  a  few  decades  later.  Rouvier  advocated  a  low 
tax  on  the  whole  of  the  taxpayer's  income,  and  sounded  the 
keynote  of  a  future  movement  by  stating  in  his  speech : 
"  You  have  several  times  proposed  an  income  tax.  You  have 
always  condemned  it,  but  it  is  like  a  convict  who  has  faith  in 
the  justice  of  his  cause,  and  who  has  confidence  even  in  his 
most  prejudiced  judges,  and  who  for  that  reason  appeals. 
The  income  tax  will  be  established  in  France ;  no  one  can 
doubt  it,  and  if  it  is  not  established  by  you,  it  will  be  by  your 


successors. 


"5 


'  See  Philippe,  pp.  105-106;  Chailley,  p.  54I;   and  Gaslun-dros,  p.  515. 
2  Chailley,  p.  542. 

•  Cf.  M.  Aubry,  /.'//  /iV  sitr  U  Rr,ettu  siim  /).'</,inith>n  ni  /n.iuisilioii,  l<ase 
sur  le  Kiipfcrt  <le  la  Valrur  locative  Uu  1-oyer  DtimesliijUti/t  chaqtu  ContribuabU 
avec  V l-.ns.-mblc  ,U  son  Kettnu.     Paris,  1S7J. 

♦  Chailley,  p.  543. 

*  "  V,)us  avez  plusietirs  fois  deja  statue  sur  I'impot  sur  le  revenu,  vcjus  I'avez 
toujours  conilamne,  mais  c'est  un  cnrnlamne  i|ui  a  la  fi>i  dans  la  iustice  de  sa  cause 
ct  qui  a  contiancc  dans  scs  juycs  mciiic  jr-  j-'as  prevenus  •-ontrc  .ui,  0  c=t  p."."rr;-.;:.! 


288 


The  Income  Tax 


The  general  judgment  on  this  whole  period  has  been 
summed  up  l)y  a  recent  French  writer.  He  tells  us  that  the 
bourgeoisie  which  had  attained  power  and  replaced  the  no- 
bility and  the  clergy  in  the  government  of  the  country,  rein- 
troduced, to  a  great  extent,  although  indeed  in  a  somewhat 
less  brutal  form,  the  privileges  which  the  Revolution  had  de- 
sired to  destroy.  On  one  prelext  or  another,  they  opposed 
all  the  plans  which  from  1 84S  on  were  submitted  to  remod-l 
the  fiscal  system,  and  to  give  to  direct  taxation  a  just  and 
equitable  preponderance  over  the  indirect  taxes  supported 
chiefly  by  the  less  fortunate  classes.' 


m 


§  4.    From  Gambctta  to  the  PMu  Amendment.     1S76-1887. 

After  the  setback  of  1871,  perhaps  the  most  notable  at- 
tempt to  reintroduce  the  idea  of  the  income  tax  was  that  of 
the  famous  statesman  Gambetta.  In  1876,  after  the  adop- 
tion of  the  new  constitution,  Gambetta  was  chosen  chairman 
of  the  budget  commission,  and  in  his  report  outlined  a  gen- 
eral programme  rather  than  a  definite  bill  embodying  an  in- 
come tax  scheme.  The  way  had  been  prepared,  in  a  measure, 
b\  several  monographs  on  the  income  tax,  of  which  the  mos"; 
important  were  those  of  Staehling  and  Rochard.^  Gambetta, 
however,  went  his  own  way.  He  'ells  us  in  his  report  that, 
so  far  as  direct  taxes  are  concerned,  it  is  necessary  boldly  to 

il  en  appellc  de  vutro  prenni^re  decision  h  votre  liarre  meine."  —  Philippe,  p.  109. 
See  also  Vvos  Cluyut,  p.  ri),. 

1  "  I.a  h.mrgooisie  qui  avail  conquis  le  pouvoir  et  rcmplacc.  dans  le  gouverne- 
mcnt  dii  jiays,  la  m.blossi-  et  le  clerge.  lit  d..nc,  s.ms  une  forme  nioins  brutale  il 
est  vrai,  revivre  en  t;ran  !e  partie  les  privilej^es  (pie  la  Revolution  asait  vovilu 
aneantir.  Sous  divers  prete\t<s,  alle  rep.jussa  tous  les  projets  .[Ui,  surtout  a 
partir  de  1S4S,  furent  deposes  pour,  au  nuiven  de  la  refoiite  de  notre  systeme  lis- 
cal  et  par  retablissement  d'uii  iiupot  sur  le  revenu,  doiiner  a  I'impot  direct  une 
juste  et  ei|uitahlc  preponderance  sur  I'impi't  indirect  supporte,  surtuut,  par  les 
classes  peu  f..rlimees."  —  ( .eraud-Hastet,  t'ne  rraniformalion  SaiaU.  M.  Cail- 
l.ili.r  tl  r ImpM    iir  le  Kr.eiiii  f\p!i./its.      I'aris,  n.  d.  [l')lo],  pp.   142->4j- 

-  tliarles  Staehling.  I'Impol  ur  les  Afzenits.  Paris,  1S76;  and  />  /"/;«/,)/ 
lur  le  Kevenu.  Paris,  \\- ;  M.  KoJiard,  Ih-  I'lmf;,!  Pnea  u<r  /.•  A',rc»«. 
2  '.;a,rts    ti.  '1.  '18771. 


m 


The  Income   Tax  in  France 


289 


undertake  the  consideration  of  an  income-tax  project.  "  We 
have  investigated  how  such  a  tax  could  be  estublished  here 
with  due  regard  to  our  actual  organization  and  our  financial 
habits,  while  dealing  delicately  with  the  transition  and  pre 
serving  in  our  actual  system  all  that  is  not  opposed  to  it. 
We  do  not  wish  to  upset  anything,  nor  to  compromise  the 
credit  of  F"rance.  We  desire  only  to  eliminate  from  our 
legislation  the  other  bases  which  have  been  introduced  into 
it,  and  which  are  opposed  to  the  higher  principle  of  propor- 
tionality, as  found  in  the  income  tax."  '  The  only  part  of 
the  old  sy.stem  that  (iambetta  desired  to  retain  was  the  land 
tax;  all  the  other  exi.sting  ta.xes  he  expanded  into  the  various 
schedules  of  a  comprehensive  income  tax.  He  was,  however, 
not  in  favor  of  the  abolition  of  the  existing  direct  taxes  and 
their  replacement  by  a  single  income  tax  resting  on  the 
declaration  of  the  taxpayer.  This,  he  thought,  would  involve 
entirelv  too  great  a  risk.  !t  v  ould  lead  to  immense  frauds 
and  evasions,  and  would  thus  necessitate  a  rate  so  high  as 
to  be  burdensome  to  the  honest  taxpayer.  Moreover,  it  would 
involve  too  much  inquisition.- 

Gambetta's  scheniC  was  opposed  in  committee  by  Leon  Say 
who,  fron.  now  on,  became  one  of  the  leading  opponents  of 
the  income  tax.^  Notwithstanding  Say's  heated  o))position, 
however,  the  project  was  adopted  by  the  commission  and  was 
submitted  .0  the  Chamber.  But  although  the  report  led  to 
a  general  discussion,  the  great  political  crisis  of  1877  pre- 
vented any  serious  attention  being  paid  to  it,  and  nothing  was 
accomplished.^ 

In  the  following  year,  1S78,  I.arochc-Joubert  repeated  his 
old  proposition  for  a  general  jiroperty  tax,  which  liad  been 
originally  advanced   in    1870  and   again    in    1876.     This  bill 

1  This  part  of  the  repurt  is  rc|irinti-ii  in  Cliaillrv.  yy.  545 -5  K>. 

^  For  this  part  (if  (iaiiilietta's  re|i>rt.  see  I.  Caillaux,  i:  Impiit  iur  le  Re-fnu. 
Paris,  1910.  lip.  I  ?3   134.     I'or  ('lainlatla'^  »pfi.-tli,  see  also  tiuyot,  pp.  H)6-;oo. 

'  For  Say's  nlijectinns,  see  (  haillcy.  pp.  554^555. 

*  For  a  ilisoussion  of  ("lambctta's  ]ir,mTt,  ser  an  .uticle  liy  I  inn  Sav,  cntitloil, 
"I.cs  Roformes  projetes 'isns  la  Syslinu  'I'lnipnts  in  Irante.  la  I'rMpositiun  ile 
.M.  Ciambftla.     I.'Impot  sur  if  \\t!ver\\x."  JouriKil  Jes  £<oito"ii^tei.  May,  l!<77. 


290 


The  Income   Tax 


purported  to  "transform  the  entire  tax  system  in  order  to 
serve  more  equitably  the  interests  of  the  most  numerous  parts 
of  the  population."  '  This  scheme  for  a  general  property  tax 
or  a  tax  on  capital  had  been  advocated  in  France  for  several 
years  by  quite  a  number  of  writers,  of  whom  Menier  was  the 
most  prominent."''  Menier's  enthusiasm  for  a  single  property 
tax  was,  however,  based  largely  on  mistaken  information  as 
to  the  workings  of  the  system  in  America,  and  found  but 
scant  favor  with  Parliament.  In  1880  it  was  succeeded  by 
the  project  of  Marion  for  a  low  general  income  tax^  and  in 

1882  by  that  of  Silhol.  who  followed  rather  closely  the  scheme 
which  had  been  adopted  a  few  years  previoiijiy  in  Italy.*     In 

1883  several  bills  were  submitted  to  the  consideration  of  the 
Chamber,  that  of  Leydet*^  for  a  progressive  income  tax,  that 
of  Sourignes"  for  a  combined  property  tax  and  income  tax, 
and  that  of  Ballue  for  a  compensatory  income  tax  on  mov- 
able property,  with  high  rates  and  differentiation.  Ballue's 
proposition  'attracted  wide  attention  and  was  referred  to 
a  committee.     Between   1883  and   1886  Ballue  varied  these 

1  rropositum  Je  I.o,  ax,uit  p.uir  Ol'j(t  df  Innnformer  tout  noire  Systemt  ,/'/;«■ 
/dA,  Jf/.HO„  a  ,-e  que  rhUhct  dcs  J'ofulatwm  Us  plus  uombreuses  se  trouv^nt 
plus  :.iHUabUmcnt  obscrrh.  Prcs'-ntce  par  M.  Laro.he-Joul.ert,  Chambre  des 
Deputes,  Session  ile  187S,  no.  305. 

-  See  cspeciallv  his  buol<s  enlitled,  Dh  KeUUif  et  Je  IWbsolu  en  mature  d'Tin- 
pais  ou  fUude  Comparative  du  Prinape  des  Impdts  Directs  el  des  frnpsts  hidireets, 
1872  ;  R.ponsc  ,iux  Obie.Uons  fetes  eontre  V Impit  siir  le  C~>t"'-l  '•  '"  ^■"""  "''^ 
/„  So.n:-  d  Aonomie  /Wilt./ue,  1S72;  /../  A\'/orme  l-iscale,  iSjj;  nimpUsur 
le  Capital,  1874;  /.a  Soei't.'  d'f:,onomie  Polili.iue  et  rimpit  sur  !e  Capital,  1875; 
Mlmoire  a  MM.  lis  Membres  de  la  Commission  du  Hudgel,  1S76.  Other  cnii- 
temporarv  advocates  of  the  single  tax  on  capital  or  a  general  property  tax  were 
Char.. 01.,' /v. vW  ■'"''"  /'"/'"'  C'ti'/w  ■'"*'''  ''"  '""""  '"'  <'"/"'"'•  ''=*"*•  '^75; 
Anu'dce  I.a-^soaii,  .9»)-  diverses  Qu.slions  relalr.es  a  Vlmpdl.  I'aris,  1S76;  and 
the  anonymous  work  /V  la  Fran^formation  de  Pimp:,!.  i:Cnilaxe.  Impol  sur 
le  Capital  et  sur  Us  f-.i: meats  Conslitutifs  des  H: nefices  et  du  Kr.enu.  Saint 
tjueiitin,  1877. 

3  I'rinted  in  (luvot,  pp.  202-203. 
«  Cf.  Chailliv.  pp.  ^;7  57°- 

•■'  J'roposilion  de  I.o,  aravt  pour  Obiet  d'.'tablir  un  Impid  sur  le  Revenii.  pro- 
porlvninel  el  prox're^^n:  I'resentee  par  M.  I.eyd.t.  Chambre  des  Deputes, 
Session  de  tSS;.  n...  2224. 


'  For  the  schemes 


lild  Sv 


QA  —  2' 


>rtft 


Tlic  Income  Tax  in  France 


291 


to  introduce  them  in  reality  fo 


tunes, 
c  report  of 


propositions  sn 

The  introductions  to  these  bills,  together  wit 

the  commission  to  which  they  were  referred,  contained  long 

descriptions  of  the  existing  situation  in  France  and  abroad,  as 

well  as  an  interesting  discussion  of  the  various  methods  of 

income  taxation.      In  a  detailed  history  of  the  French  reform, 

the  propo.sitions   of    Hallue  would   meiit  a  careful  analysis. ^ 

Nothing  came  of  all  these  efforts,  however.     In  the  meantime, 

analogous  schemes  had  been  presented  by  Paul  Bert  in  1885, 

calling   for   a   seven-per-cent   general   income   tax,^  and  by 

Wilson,  by  Hourgeiis,  and  by  Camille  Dreyfus  in  1S86.* 

Bv  1886,  howi  er,  the  movement  in  favor  of  a  reform  of 
the  tax  system  had  become  so  pronounced  that  the  entire 
subject  of  the  income  tax  was  referred  for  careful  considera- 
tion to  the  budget  commission.  The  report,  which  was  writ- 
ten by  the  well  known  economist  and  subsequent  Minister 
of  Commerce,  Yves  Guyot,  was  presented  in  October,  1886. 
It  was  a  notable  production,  and  was  iniblished  separately 
in  book  forni.^  Guyot  gave  a  short  account  of  the  principal 
systems  in  existence  throughout  the  world,  and  added  a  sum- 
mary of  all  the  projects  which  had  been  advocated  up  to  that 
time  in  France.  Although  he  was  a  confirmed  free  trader 
and  a  determined  opponent  of  all  indirect  ta.xes,  he  concluded 

1  These  bills  and  reports  are  as  fuUuws  :  Profoution  de  Loi  a\ant four  Objel 
la  R; forme  ,ie  V Asuflle  ./,■  Vlmpot.  rrcseiitCc  pai  M.  ISalliie.  (  haiiibre  des 
Deputes,  Session  <le  iSS.;,  no.  i6ro.  So  pp.;  Prof-o^i/wii  Je  I.oi  .lyant  pour  Ohjet 
la  R: forme  </,■  I'Asiiette  mr  /Vw/>,V.  Presentee  par  M.  li;>llue,  et  plusieurs  de 
ses  ColK'j^ues.  Chamlire  <les  Deputes,  >  Mon  I-;>.tra..r.linaire  <!e  18X5,  no.  t),, 
209  pp.;  happorl  fjit  <iu  iir'ii  J<-  la  I'oni'nis^ion  , //,;<;,,'>  ,/\:x,ii>iiii,r  .../,( 
R.-forme  ,/f  I'.hiiette  <ie  nmp;t.  I'resenlee  par  M.  A.  Hallue.  (.-liamlirr  .les 
Dei)utes,  Session  l-Atraordinaire  de  iSSo.  no.  1314.  27.!  PI'-  I<"tM'^  S.nniuure 
fait  ciH  iwm  dell  Prcmure  Comnn^ii'.n  d' hntiMi:,-  r,irl,meiitiu-e  duir-;',-  d\\\- 
aniiiur  !.,  /;,p,'si/u'H  de  lot  de  M.  /^.iHue  e! plH>tfur<  de  .<,.,  (>//<««.  <n,ii,t pour 
Oh, el  l.i  R:,..i'me  d  r.Uue/te  de  r  Impot.  I'ar  M.  Fran,  is  I.aur.  Ch.  ml.re  des 
Deputi'"^,  Session  iSSii,  no.  360,  65  pji. 

■^  Cf.  Gaston-( '.ros,  p.  519. 

"  Cf.  Philippe,  p.  121. 

<  Yves  i;.uvot,  i: Impol  iur  !e  Re:,>iii.  R.tpforl  fait  .,■«  iiom  de  l.i  Commission 
du  FHd:^et  sur  !es  Que-liom  soulro.'o:.  far  dr.erses  I'rofonti.  1:^  relatives  li 
iljnf'i'.t^.ur  le  Reve^iii.      Paris.  I-S-SO. 


293 


The  Income   Tax 


that  the  path  of  reform  lay  rather  in  the  improvement  of  the 
existing  system  of  "  real "  taxes  than  in  the  adoption  of  any 
form  of  income  tax.  A  discussion  ensued  in  November. 
Andrieu.x  declared  himself  in  favor  of  the  princiijle,  but  stated 
that  the  great  question  to  be  determined  was:  What  kind  of 
an  income  tax  are  we  prepared  to  accept  ?  Camiile  Dreyfus 
attempted  to  answer  in  full  the  objections  to  an  income  tax 
which  had  been  raised  by  some  other  speakers.  The  discus- 
sion was  cut  short  by  Carnot,  the  Minister  of  Finance,  who 
declared  that  in  his  opinion  the  time  had  not  yet  come  for  the 
introduction  of  an  income  tax.^ 

The  growing  feeling  in  favor  of  some  kind  of  an  income 
tax  could  not  be  checked,  however.  Tax  reform  was  fast 
coming  to  the  front  as  a  political  question,  and  the  Ministers, 
Sarrien  and  Jules  Ferry  as  well  as  Freycinet  himself,  were 
led  to  emphasize  the  point  which  had  been  made  a  decade 
before  bv  Rouvier,  namely,  the  need  of  reform  on  democratic 
lines.  When  Freycinet  was  succeeded  by  Goblet  in  i886,  he 
put  the  plank  of  democratic  tax  reform  in  the  very  forefront 
of  his  programme.  The  feeling  had  now  become  so  pro- 
nounced that  on  February  18,  1887,  Deputy  Perin  and  a 
number  of  his  colleagues  moved  an  amendment  to  the  annual 
finance  law  in  the  words  :  "  The  government  is  invited  . j 
present  the  project  of  a  single  and  progressive  income  tax." 
After  an  elaborate  speech  by  I'erin  tiie  motion  was  adopted 
by  the  House,  by  the  substantial  majority  of  257  against  228 
votes,  although  the  words  "single  and  progressive"  were 
eliminated.- 

It  is  true  that  the  Senate  expunged  this  addition  to  the  law, 
but  the  important  point  had  been  gained  ;  since  the  Chamber 
of  Deputies  liad  now,  for  the  first  time,  put  itself  on  record 
as  in  favor  of  some  kind  of  an  income  tax.  What  was  hence- 
forth known  a.s  tlic  I'erin  amcndm  "it  thus  came  to  play  a 
great  role  in  the  movement,  and  from  now  on  the  government 
itself  began  to  take  the  matter  energetically  in  hand. 

I   The  iliscussion  will  bo  fouml  in  l'hiliii|ii;,  pp.  122-IjS/. 
-  tor  I'erin's  speech  sec  Fiiiiippc,  [jp.  139-150. 


The  Income   Tax  in  France 


293 


§  5.    Fnnn  Dauphin's  Bill   to   the  Extra-parliamnitary 
Commission,  iSSj-iSg4 


From  1887  on,  at  intervals  of  every  year  or  two,  government 
introduced  an  income  lax  project,  each  of 


after  government 
which  differed  more  or  less  from  that  of  its  predecessors,  in 
the  vain  hope  of  winning  the  assent  of  i  le  House  to  some 
particular  scheme.  It  needed,  however,  a  quarter  of  a  century 
to  bring  about  the  desired  result.  The  opposition  was  loud 
and  energetic,  and  the  natural  repugnance  of  the  propertied 
classes  to  any  such  innovation  was  heightened  by  the  attitude 
of  the  economists.  The  liberal  school  was  now  at  the  zenith 
of  its  influence,  and  the  introduction  of  the  study  of  economics 
■  "^o  the  law  schools,  which  was  after  a  decade  or  two  to  bear 
t'liii  in  a  younger  and  more  progressive  set  of  economists, 
vvas  still  too  recent  to  produce  any  effect. 

Leroy-Beaulieu,  in  his  classic  work  on  the  Science  of  Finance, 
originally  published  in  1877,  and  reissued  in  new  editions 
every  few  years,  vigorously  opposed  the  income  ta.x.  In  this 
he  was  ably  seconded  by  Lt-n.i  Say,  who  now  in  the  eighties 
and  early  nineties  did  not  tire  of  making  speech  after  speech 
against  it,  and  who  gave  a  special  course  of  lectures  in  the 
school  of  political  science,  devoted  to  the  attempt  to  show 
the  dangers  and  inicpiities  of  the  system.'  fhe  monotonous 
uniformity  of  the  literary  opposition  to  the  income  tax  was 
broken  in  the  eighties  by  only  two  books.  One  of  th.se  was 
written  by  Professor  Denis  at  the  instigation  of  the  common 
council  of  Brussels,  and  consisted  of  an  admirable  report  on 
local  income  ta.xes  in  Belgium,  and  national  income  ta.xes 
abroad.2  As  this  was,  however,  meant  primarily  for  Bel- 
gian consumption,  it  e.xertcd  but  little  influence  in  France. 
The  other  was  by  a  French  lawyer,  Ciiailley.  who  wrote  what 
is  still  to-day  one  of  the  best  books  on  the  subject,  —  accurate, 

'  These  I'lctures  were  piihlishcd  in  bonk  fnrm  urnter  the  title,  I.ii  Solurwo^ 
Phnoaati.jiiis  ./r  l,i  (Jiiesti.n  MS  lnif<:<ti.  (  o)il')  cK.i  i  failts  ,;  I'  i:,o.'c  JrS  S,  uiu.s 
/•olUiiiiici.      r.n   M.  l.e^'ii  S.-iy.      2  vuli.,  I'ari^,  l^Sn. 

-  il.  Denis,  I'Impot  s:ir  u-   Anritii.       /uipf  nt  el  Doaimcnti  /-r  ioilis    [^"\ 


^1 


294 


The  Income   Tax 


sober  in  judgment,  and  progressive.'  Chailley  sought  to  ox- 
plain  how  it  was  that  so  necessary  a  measure,  feared  by  some, 
ridiculed  by  others,  submerged  under  the  general  indifference, 
should  nevertheless  always  return  to  the  surface.  He  ex- 
plained it  by  the  fact  that  it  is  extremely  difficult  to  convince 
a  country,  where  old  habits  are  .so  powerful,  of  the  necessity 
of  reform.  Hut  he  asserted  that  in  France  a  question  is  never 
completely  buried  ;  and  he  predicted  that  the  time  .vould  come 
when  the  income  tax  would  have  its  day.-  Although  Chailley 
was  a  member  of  the  Society  of  Political  Economy,  he  was 
really  outside  the  charmed  circle,  so  that  ne  also  made  but 
a  slight  impression.  Other  books  were  published  at  about 
this  time,  by  men  like  Besson,  Jenot,  Boucher,  and  Martinet, 
but  they  did  not  really  represent  scientific  opinion.'''  The 
general  attitude  of  the  economists  may  be  inferred  from  the 
action  taken  by  a  committee  which  awarded  a  prize  offered 
for  the  best  suggestion  as  to  a  reform  of  taxation.  In  1877  a 
society  was  founded  to  consider  the  whole  subject  of  fiscal 
reform.^  It  was  created  by  a  manufacturer,  A.  Raynaud,  and 
on  the  advisory  council  were  the  most  prominent  economists 
of  the  day,  like  Chevalier,  Passy,  Leroy-Beaulieu,  and  Gamier. 
The  founder  offered  a  large  prize  for  the  best  essay,  and  no 
less  than  sixty  c()mpetin)rs  handed  in  their  papers  in  1879. 
The  committee  of  award  agreed  that  the  actual  system  was  in 
urgent  need  of  reform,  but  decided  that  the  income  tax  was 
inquisitorial  and  that  the  prize  should  consequently  go  to  M. 
Lorrain,  vvho  advocated  a  stamp  tax  on  government  securities.^ 
The  government  was  now,  however,  alive  to  the  exigencies 

»  Chailley,  /.'/»;/■<)/  mr  If  Kt:enu.     Taris,  1884.  ^  O/.  cit.,  pp.  573-575- 

^  liesson,  nimpbt  stir  te  Rnenii.  Paris,  1884  ;  Jenot,  de  f  Impotsur  le  Reienii, 
I'aris,  18S5;  limicher,  /x.foime  Jc  V Impct.  Amiens.  18S7  ;  Martinet,  /«  /'?/- 
f  rentes  formes , It'  l' /iiifdt  siir  le  Keieiiu.  I'aris,  iSf>S.  Compare  also  tlie  hook  of 
Deputv  liallue  mcntioneil  above,  Di'serialiviis  stir  /,/  /('/  ,/e  I'  hnpol  stir  If  Kevenu. 

*  Under  the  name  of  Sociitl  a"  AtuJes  /'.eotiomii/ues  pottr  !es  K^f'rmes  Iisuilfs. 

'••  An  account  of  the  deliberations  of  tlie  Commiltee  an.l  a  reprint  of  the  pri/e 
essav  will  be  found  in  tlie  !)ook  entitled,  I es  /\,'/[>rnie>:  I-'i't.tl.s.  A\'vi'/i</ii'ii  I''- 
ci/i./iie  par  r Impit  stir  Us  Kevetius.  Systeme  Jf  M.  J<:,,iiies  I.orr.nn  premier 
I  aur  ,it  Jii  I  'lui.uitrs  .invert  pir  hi  St'ei't,'  J'  f\  I  tides  f-'.f'itomiques.  fond:  e  en  /SyS. 
Par  .\.  Raynaud.     Avee  une  Preface  d'Au.i;ustin  ( ialopin.     I'aris,  1S8S. 


t 


m 


The  Income   Tax  in  France 


295 


1 


of  the  situation,  and  after  the  favorable  vote  of  the  Hous-; 
on  the  Perin  amendment  in  1887  decided  to  persist.  In 
February  of  that  year  the  Minister  of  Finance,  Dauphin,  in- 
troduced an  elaborate  scheme  which  was  in  effect  an  attempt 
to  measure  individual  incomes  by  legal  presumptijns  or  out- 
ward signs,  and  to  utilize  for  this  purpose  primarily  the 
amount  paid  for  house  rent.'  Dauphin's  project  was  almost 
entirely  based  on  a  memoir  by  Dr.  G.  Koenig,  an  Austrian 
writer,  which  was  published  shortly  after  in  book  form.-  It 
was  opposed  primarily  by  M.  Jules  Roche,  who  from  now  on 
became  second  only  to  Leon  Say  as  the  most  vigorous  op])o- 
nent  of  any  income  ta.\  scheme.  As  a  consequence,  Dauphin's 
bill  was  withdrawn. 

After  the  failure  of  this  attempt  the  new  Minister  of 
Finance,  I'eytral,  submitted  a  somewhat  different  project  in 
the  following  year.  I'eytral  tells  us  that  "  it  is  superfluous  to 
remind  Parliament  of  the  fact  that  the  income  tax  has  for  a 
long  time  been  a  plank  in  the  republican  platform.""  In  con- 
tradistinction to  Dauphin's  .scheme,  he  suggested  a  general 
income  ta.x  based  somewhat  on  Knglish  lines,  but  containing 
the  principle  of  differentiation,  lie  concluded  his  lixposi'  dc 
Motifs  in  the  following  words :  "  Far  from  inciting  to  a  class 
war,  we  regard  the  income  tax  as  the  surest  method  of  re- 
establishing i)eace  between  inter  \sts  which  often  think  them- 
selves in  opposition,  becau.se  they  are  called  upon  in  our  so- 
ciety to  play  different  roles,  interests  which  will  be  the  better 
able  to  comprehend  the  advantages  of  union  when  the  govern- 
ment ceases  to  burden  them  unequally."  '     Peytral's  bill,  how- 


1  For  Dauphin's  /Ci/c.v'  des  Mi'tip,  sec  I'liilippe,  jip.  15CKI55. 

-(J.  Kiicnij;,  (n  .W-ti-.t!  Imf-ot  siir  !,■  A'i-r,i!n.  M  in.ire  .jtii  a  hisfir'  le 
Projft  iiu  iiint:  fynemtnt  rdatif  'i  la  K  hrnie  at  la  C.^n/rihul:  ai  /'fruniiiellr- 
Mohluif.  Dcpiiso  sur  lo  ISiirciu  Ac  la  <'liainl)re,  par  M.  Daupliin,  Ministrc  iles 
l-inantcs,  Ic  26  Fevrjor,  1S67.     I'.iris,  1SS7. 

'  Projet  dt  Li'i  f-.'rtant  fita'li  -,->".eul  d'un  ln,p!,i  Glit'ral  uir  h  Kf:  fiiu. 
Presente  par  M.  IVytral.  Chambre  des  Deputes.  .Sessiun  F\tiaorilinaire  .le 
188S,  no.  3123,  82  pp.     .Set'  p.  2. 

*  "  ISien  luin  de  iiousser  .".  la  j,'uerre  .les  classes,  nous  envisa^jeoiis  I'impot  sur 
Ic  revciiu  eciiuuc  !c  p'iis  ?v;:  m  •Vvii  -lo  vOtshlir  Is  c-'iieordc  cntre  des  intercts  ipii 


296 


The  Income  Tax 


ever,  did  not  fare  any  better  than  that  of  Dauphin.  It 
was  referred  to  a  committee,  but  did  not  meet  with  a  favor- 
able public  reception  '  and  was  not  reported  out.  As  a  con- 
sequence the  income  tax  now  for  a  short  tine  disappeared 
from  the  government  jjrogramme. 

But  tax  reform  was  none  the  less  energetically  discussed 
in  the  Chamber  of  Deputies.  Outside  the  income  tax  the 
most  prominent  plans  that  were  from  time  to  time  submitted 
to  the  country  were  the  general  property  tax  and  the  grad- 
uated inheritance  tax.  The  earlier  schemes  of  Menier  and 
Laroche-Joubert,  for  a  general  property  tax,  have  been  referred 
to  above.2  From  time  to  time  similar  bills  were  introduced  and 
even  discussed  during  the  eighties,  but  Menier  found  continu- 
ally fewer  adherents.  Among  these  perhaps  the  most  promi- 
nent was  Catalan,  an  old  tax  official  who  now  published 
his  scheme  for  a  single  tax  which  had  been  originally  sub- 
mitted to  the  universal  scientific  congress  in  i883.'''  In  1888, 
however,  Planteau  submitted  a  bill  embodying  a  rather  elab- 
orate combination  of  a  progressive  property  tax  and  a  pro- 
gressive inheritance  tax.  His  explanation  of  the  scheme 
affords  an  interesting  and  instructive  account  of  the  French 
situation,  from  the  radical  point  of  view.*  The  committee  to 
which  the  plan  was  referred  reported  it  as  on  the  whole  some- 
what chimerical,  and  could  not  see  its  way  to  approve  the 

souvent  se  croicnt  opposes  parce  (ju'iU  sunt  appeles  .\  joucr  dans  notre  aociae  an 
rule  ililiilTen',  ct  .|ui  pouiroiu  niic-ux  cuinprcmlrc  lulilite  de  s'uiiir  lutsiiue  k-  lisc 
ccssera  ilc  Ics  frappcr  inufjal.  iiR-iit."  —  //';</..  p.  iS. 

I  (^f.  ihesLiiLS  uf  KtttTs  in  tht-  .1A.(,;,7V  ./f  /',;;;■:.  in  November,  iSSS.by  IFeiiri 
Duijuies,  whidi  uore  roprintcl  in  '-.ok  form  under  tlio  title,  /.«■  Projd  ,r Im/^:,! 
sur  le  Rcv.iiu.     Paris,  iSSS. 

-  Su/i>;i,  pp.  28')-2i)0. 

'  /)f  la  Ir.imformation  de  V  lmp:<t.  I.Titilnxe.  ImpM  sur  /'.-Iroir  dt 
Ouuun  et  sur  les  l-.Umeiits  CoitsHtutifs  da  /'..'nifit-a  et  du  ki-.niii.  I'ar  \.  de 
Catalan.     Paris,  1S90. 

♦  Frcfosiltcn  df  /  ■■{  „v,iiif  f.>ur  OI;et  In  Reforme  dfi  Imt-Mi.  I'resentC-e  par 
M.  Planteau.  Chainhre  des  Deputes.  Session  de  iSS.S,  no.  25I1S,  147  I'p.  (  om- 
pare  (iaston-Cros  l>.  jK).  Two  years  later  I'laiiteau  e\pande.l  his  proposition  into  a 
consi.lerable  hook  with  tlie  title,  l.a  K.forme  ■/«  I<-i/<6ls.  Par  K.  V..  Planteau, 
antien  depute.     Pa-'is,  1S9O. 


The  Income   Tax  in  France 


297 


scheme.'     Similar  projects  for  some  kind  of  a  general  prop- 
erty tax  were  introduced  in  1890,  by  Locruy  and  colleagues, 
by  Rabier  and  colleagues,  and  by  Leconte,  but  met  with  no 
success.'''     The  same  fate  befell  a  somewhat  similar  proposi- 
tion of  Maujan  in  1891.     Maujan's  scheme  is  especially  inter- 
esting, not  so  much  because  of  its  advocacy  of  a  graduated 
inheritance  tax,  but  because  he  joined  to  this  the  proposition 
for  a  combined  property  and  income  tax.     He  divided  prop- 
erty  into  four   categories   and   income    into  four  additional 
schedules,  with  separate  rates  on  each,  calculated  according 
to  the  net  income  and  with  a  progressive  scale.     It  was  virtu- 
ally a  combination  of  the  Italian  and  German  systems,  with 
some  new  features  of  his  own.     The  plan  attracted  so  much 
interest  that  it  was  referred  to  a  commission  and  separately 
published.^     The  commission  brought  in  two  separate  reports 
in  1892.     One  report,  devoted  to  the  progressive  inheritance 
tax,  was  written  by  Dupuy  Diitemps,  and  was  unfavorable  to 
the  scheme.^     The  other,  by  Pierre  Merlou,  accepted  Maujan's 
proposition  for  a  property  and  income  tax.  but  elaborated  ir 
considerably.^     Nothing,  however,  came  of  the  report.     Ac- 
cordingly Maujan  reintroduced  his  scheme  with  some  modifi- 
cations in  1893,  and  again  almost  a  decade  later.     During  the 
nineties  he  found  a  few  followers  in  the  somewhat  similar 
projects  of  Guillemet  and  Terrier,  in  February,  1894  (repeated 
in  1896),'^  and  of  Pierre  Merlou  and  Pelletan  in  March,  1894." 

1  Kaf-port  Sflinm.n-r  fiil  alt  iwm  Je  /.;  -•/'  Commi.iion  J' fintiativc  /'•ir.'i- 
m,„t.,n;'  .'„„x\-  .i\:un>, ,„,■<■  I,:  /V,./  ;//."/  /-'  /.'/  ./'■  M-  riuiteau.  I'ar  M. 
Charlof   CheiUier.      (  hambre    iles    Ilepu!>:-,   Sos«i..n    K.Mraurdinaire.    |8SS,    nu. 

J0(i4. 

-  l-'nr  those,  see  f.aston-tir.i'i.  I'p.  \M,  521. 

•> /,;  K.io'-mt  r.hur.U,-  Jt  i'lnifit.  Tar  M.  Maujan.  Depute,  et  un  g.^"d 
niimbre  ih-  sts  i  cUiKues.     Paris,  1891. 

*  h\ipp'>l  hilt  .III  n,"'i  </:■  hi  Commisiim  ,ha>-);U  J\x,r:iiiier  In  J'rofostlum  dt 
l.oi  .//.'l/.  Maujan  et  un  ),n<nui  nornhn  a'f  us  Ccinxu/i  ayaiit  pour  Ohj.1  la 
K:j:..,;„e  Ghih-ale  de  rinipol.     I'ar  M.  Uuiiuy-Uutrnips.     I  liai.ilire  >lis  Deputes, 

Scssiun  (le  iSq.:,  ii".  ^^">'i-  U  I'l'' 

5  A  summary  of  this  rciH.it  uill  !'>■  l-unl  m  ( .a-ton-t  ;r..>,  pp.  321-523. 

''  See  rhi'ij-i'c,  i-'..  17S-US-,. 


298 


The  Income   Tax 


Asa  consequence  of  these  miscarriages  of  reform,  the  legis- 
lators reverted  to  the  scheme  of  the  income  tax.  Occasional 
monographs  had  ai)peared  on  the  subject,  like  Chaix's  enthusi- 
astic plan  for  a  single  tax  on  incomes.'  In  1891  three  depu- 
ties, M.M.  Laur,  Le  V'eille,  and  (ioussot  reintroduced  I'eytral's 
bill  of  1888.  In  their  Exfost'  ,Us  Motifs,  they  ask:  "  Mow  is 
it  possible  that  a  project  of  this  nature,  embodying  so  lofty  a 
principle,  and  emanating  from  the  government,  lias  not  had 
the  success  which  democracy  had  the  right  to  expect .'  "  "  We 
do  not  know,"  they  answered;  "parliamentarism  has  myster- 
ies even  for  those  who  watch  it  at  work  from  day  to  day.'"'* 
They  hIso  succumbed  to  the  same  mysterious  influence. 

Beginning  in  1S93,  however,  there  was  ushered  in  with  the 
new  Chamber  a  period  of  scientific  discussion  of  the  income 
tax  which  was  now  again  taken  up  by  the  ministry.  The 
partisans  of  the  income  tax  gradually  crystallized  into  three 
groups,  each  with  a  separate  plan  which  now  received  a  dif- 
ferent nomenclature.  The  first  group  was  in  favv<r  of  what 
Ribot  shortly  afterwards  called  "the  French  form  of  the  in- 
come tax,"'  namely,  a  tax  resting  on  outward  signs  or  presump- 
tions, and  based  largely  on  some  modification  of  the  existing 
coiitrilattio)!  piisouiulli-  it  iitobilicn-.  This,  as  we  know,  was  at 
the  bottom  of  Dauphin's  scheme  in  1877.  It  became  known 
as  the  impot  iiuliciaiir  stir  le  rcviun,  that  is,  the  " presumptive 
income  tax,"  and  found  a  literary  advocate  in  Catalan.''  The 
second  group  was  in  favor  of  a  lump-sum  income  tax,  largely 
on  the  Prussian  model,  resting  on  declaration,  and  with  severe 

'  A/iu/i'  i«r  r Or);,iiihiilioii  <{ ' un  Impot  i'liiijue  et  ite  Riptirtition.  fl'ar  K. 
Chaix,  IVrci'iiti'ur.  I      MarseilU"*.  1S90. 

-  "  I'ar  suitu  lie  ijUL-lles  cDnsiclerations  un  projet  de  cettc  nature,  crif^rijjeant  un 
lirincii)e  aussi  su|ieriuur,  ijnianant  du  (lnuvoriiL-nient,  n'.i-t-il  pas  I'u  la  suite  que 
la  (leiniicratie  utait  tn  ilroit  il'cspercr  ?  Nuu^  iie  la  savuiis.  \,k  parKiiR'ntaiiMne 
a  lies  myslercs,  nitMUe  p.nir  reus  i|ui  le  vuient  a  l''iuvre  tuus  les  jours. ".--  I^opo- 
sihoti  i/f  1 1'/  porliint  Etal'ltsscmenl  il'iiit  /'V/,V  (i! ih'ral  mr  le  Kc:  eitti.  Presentee 
par  MM.  l.aur,  l.e  Veille,  et  llcmssot.  Kxpose  des  Motifs,  Cliainhre  iles  I)eputes, 
Session  de  1S91,  no.  13S2,  27  ])p.     See  p.  7. 

■'  I'.tienne  Catalan,  I'lnipitt  el  Li  / iimille.  Projet  i/e  Kefi'rme  Je  i hnptit  Mo- 
Inlier.  Arjjenteuil,  l8i)2  ;  nn>\ /.' ftiipot  Dirt,!.  .\rt;rnteuil.  1.S94.  Catalan  based 
his  scheme  on  house  rentals,  nuniiiied  bv  the  numijer  of  thiidren. 


The  Income   Tax  in  France 


299 


administrative  control.  Tiiis  ^Tadually  became  known  as 
the  intpdt  i^lolutl,  or  simply  as  the  iutpol  sur  !c  n-vcnit.  The 
third  group  was  in  lavor  of  a  stoppaf^e-at-soiircc  income  tax, 
diviiled  into  schedules,  largely  on  the  I'Ji-lish  model.  This 
became  known  as  the  impot  iCiiiilaiii \  or  the  iinpot  siir  les  re- 
veniis.  These  new  names  were  tinally  accepted  by  all  dispu- 
tants. 

In  March,  1894, the  Ministerof  Finance,  lUirdeau,  introduced 
an  income-ta.\  bill  of  the  first  kind,  somewhat  akin  to  that  of 
Dauphin  in  18.S7,  in  that  it  also  rested,  in  part  at  least,  on  the 
legal  presumption  of  income,  as  measured  by  ht)use  rent. 
After  the  failure  of  this  scheme  and  of  similar  attempts  ema- 
nating from  the  floor  of  the  Chamber  to  effect  a  reform  on  the 
basis  of  a  house-rentals  tax,  the  discussion  for  a  time  narrowed 
down  to  a  choice  between  the  Prussian  and  the  luiglish 
systems.  Moderates  like  ("oclu  ry  and  I'oincare  were  in  favor 
of  the  ICnglish  system,  or  iin/'ot  siir  Us  iiniiit^ ;  radicals  like 
Cavaignac  leaned  to  the  Prussian  s\stem,  or  intpdt  siir  le 
irviiiii.  Many  bills  were  introduced  and  reports  of  commis- 
sions made. 

Among  the  bills  of  1894  leaning  toward  the  impdt  i^lobal,  or 
lump-sum  t  .  were  those  of  Cavaignac  and  Doumer,  of  Ra- 
meai;  and  of  the  socialists  Jaures  and  Millerand.'  On  the  other 
hand,  the  English  stoppage-at-source  scheme  was  favored 
by  Rene  Goblet.  Finally  Gendrc  took  middle  grornd,  and 
adopted  what  he  considered  the  best  elements  of  each.^  In 
the  summer  of  1894  discu.ssion  ensued,  and  the  vote  was 
taken.  Jaures'  radical  scheme  was  tabled  by  a  large  majority, 
Cavaignac's  bv  a  smaller  one.  Codet  thereupon  moved  that 
the  government  be  retiuested  to  frame  some  sort  of  an  in- 
come-tax bill,  and  this  important  motion  was  adopted  by  a 
vote  of  380  to  369.  Pelletan  furthermore  moved  that  a  par- 
liamentary committee  be  appointed  to  .study  the  whole  prob- 
lem and  to  bring  in  a  report.  In  the  meantime,  on  the  motion 
of  Minister  Poincare,  an  extra-parliamentary  commission  had 

'  See  Philippe,  pp.  ic^6-jol. 


I   'I 


■  Fef  <:n 


ia!-io6. 


300 


The  I u  come   Tax 


been  constilutccl  in  June  by  the  President  of  the  Republic. 
This  was  perliaps  the  must  interesting  event  «>1  the  period, 
and  deserves  fuller  mention. 


\   • 


5  6.    h'i,m  tlic  Extta-parlinmtutary  Commisuoii  to  tlii   /•'.iiil  of 
the  Ciiitiiiy,    /\v/-;Aw 

The  extra-parliamentary  commission  of  1894  was  formed 
primarily  to  consider  the  jjrojects  of  (Joblct,  mentioned 
above,  and  of  Pierre  Merlon,  to  whose  views  allusion  has 
been  made  several  times.  The  commission  was  invited,  how- 
ever, to  consider  the  whole  problem.  Its  membership  was 
composed  of  the  most  eminent  economists,  financiers,  legis- 
lators and  officials.  In  order  to  provide  a  basis  for  their 
deliberations,  the  Minister  of  Finance  caused  to  be  collected  a 
great  compilation  of  documents,'  illustrating  the  systems  of 
income  taxation  in  force  throughout  the  world.  The  commit- 
tee deliberated  for  a  whole  year  and  made  its  report  in  the 
summer  of  1895,  publishing  the  testimony  in  full,  as  well  as 
the  report,  which  was  written  by  Coste.- 

The  report  was  an  exceedingly  thorough  discussion  of  the 
whole  problem,  but  it  suffered  from  several  weaknesses. 
From  the  very  beginning  of  their  deliberations  it  was  seen, 
as  Coste  himself  tells  us,  that  they  were  concerned  primarily 
with  the  effort  to  avoid  two  dangers      a  declaration  which 

'  1:  l'uf:-t  ,:ir  !:•  /\,-rniii  ,■!  I'  !mf/  '■<'  /,  .  Kniiits  i/am  i:-<  /'•i\<  /'/'■./'/i.v'j. 
y\''A-t  r.'iiiihf  /'»  /.;  IUi,\li  It  (l.'ii'riil''  ./,■•■  Cuitr ihitluiu  Ihi, ■,/,-<.  l';iris, 
Iniprimerif  N'atiunale,  1SU4.  015  pp.  Tlii-;  mmi.il.iti  in  n^t  only  contains  thf  '''ill 
text  !  in  I'rcncli  tr.in-.lation  >  of  every  income-tax  law  in  loice  at  the  tiint-  at 
alvi  lonipriM^MUiuiiiai  us,  f\|ilan.Uorv  lU'^cnpliuns.anil  statistics.  It  i»  by  all  mliU 
thr  fulU  St  ilocimirr.t  o|' ilu.'  Uiii'l  ill  e\istonic. 

-  TliL-  tt'stinioiiv  w.is  puhlisln'  1  in  two  hut;<'  volumes,  un'Irr  the  title  of  ('("«- 
miiu'on  l:-\lr,il^,trlfitifiil,iire  df  f  Imf'^t  >«'■  Aw  h'r.i  1111$  iin/i/uf  f  .in  Miiiil'if 
Jr>  /•'in.iii.fs.  Ih'iift  Ju\ii  Jiiin,  1894.'  I'i,h>-  I'erhnux.  I'aris,  Imi.riinerie 
N.-.ti.  null,  i.Sii5,  2  vols,  riie  report  of  Coste  was  also  pulilish-.-'l  separately  tm.ler 
the  title,  /\':f/-<"/  (,''n'y.i //"■'<,■  11/''  iiii  now  .if  ii  Commi'ii.ni  /-..xli .//•■irlmiriit.iire 
!r  I'  t'lif.r.t  ^tir  At  Ke-  nut<.  Tar  M.  \'l"!pln'  (  osi.',  I'aris.  Imprini.-rie  N'atioiiale, 
1^0;.  ■riieresiiluti.ms  of  the  I  ornini^^ion  will  lie  founil  in  daston-t  Iros,  Appeielix 
■•'•    i  i'-  5.)'    5J^>  ='"■'  i"'^  r;;po:t  -AwM  :s  t'isia-icu,  i'A:i.,  \-\-    42.1-13!. 


The  Income   Tax  in  /•'mint- 


301 


mi^ht  oiiKciulcr  fraud,  and  an  oflki.il  coiitn  which  lni^;ht 
degenerate  into  iti(|uisilion.  This  atlitiide  is  well  rejircsented 
by  Senator  Trarieux,  one  of  the  more  inijiurtaiit  ni<'nibers  of 
the  conimiNsion,  wiio  disclosed  a  heated  ()|i]>nsitiiin  to  the 
lump-sum  .ucthod,  maintaiaiiij;  its  iiKuntcstable  iiilcrinrity  to 
the  luiglish  system  from  the  point  of  view  of  the  hhcrty  of 
the  taxpayer,  of  the  certainty  of  yield,  and  of  justice  and 
social  peace.  The  report  itself,  in  rcfcriin'j;  to  the  I'nissian 
system,  says:  "  It  is  difficult  to  ima;;ine  that  we  should  ever 
be  reduced  to  submitting  ourselves  to  so  formal  an  adminis- 
trative discii)line:  in  comparis(Ui  with  such  a  system,  our  old 
regime  of  direct  taxes,  all  of  them  so  easy  goint;  and  routine- 
like, would  seem  like  a  fiscal  oasis."  '  The  commission,  how- 
ever, was  not  especially  favorable  to  the  lMij;lish  system, 
and  drew  up  a  scheme  which  was  a  curious  mixture  of  the 
stoppafje-at-sonrcc  and  the  presumption  systems,  divided  into 
schedules  indeed,  but  virtually  retaining  the  land  tax  and  the 
house  tax,  and  makin;^  only  sliirht  chan:;cs  in  the  other  exist- 
m^  direct  taxes.  The  report  had  an  imposing  apjiearance  on 
paper,  but  on  closer  inspection  it  turned  out  to  be  really  the 
')ld  system  in  a  somewhat  new  dress.  As  one  of  its  critics 
said  of  the  commission  :  "  In  th;j  soi'l  ot  these  economists, 
statistics  had  dried  up  their  enthusiasm  ;  they  fuihlied  their 
task  conscientiously,  but  without  the  faith  which  triumphs 
over  obstacles;  their  sccjilicism  fro/ce  them.  Thilo-sophers 
around  a  green  table,  they  almost  all  lacked  that  stimulus 
which  enlivens  parliamentary  debates— the  itientity  of  per- 
sonal and  general  interest;  scholars  accustomed  to  universal 
criticism,  thev  criticised  their  own  o|)inions;  theorists  of 
doubt,  they  doubted  their  own  judL'ment;  the  desire  to  be 
circumspect  made  them  timorous;  the  fear  of  something  new- 
paralyzed  them  ;   what  they  lacked  was  precisely  that  which 

'  "II  fst  .limcile  (le  conccvuir  juc  muis  ]  arvynions  jamais  ;>  n.ii>  '..licr  a  une 
discipline  a.lministr.itive  aussi  f,  rmaline  ;  ct  en  comparai-.n  .I'un  uU>>lune. 
nntre  vifu\  ri-^inic  ilc  ccntrilmtiun':  liirr^tc^,  in.ldentes  it  r.'utirit-res  nous  ap- 
par.vttrait  coniine  une  oavi.  iman.  i."  ve.  /:  ,;f,>rf  ,;:„  nil  pr  <e,if  :!<•,•>:  Je  la 
C'n,mi'si<',i  Exlraparl  »itn;.i:>e  '<>'  VlmpM  uir  Ifi  Att,'ii:<s.  Par  .M.  .\<l(.lphe 
t'oste.      I'aris,  lMi|iriiiierie  Naliiii.ile,  ISij. 


,."fi  ■''■^^-r^i/>f:v.-f;c:?^ijiyi?^  '■■iz.'h'.  ;s  ■  ^'{'Si 


>"iir.*:i:4,-v".ijv. 


L'^,~.,-^'^'^S 


;  i 


302 


The  Income   Tax 


they  most  despised  —  politics."  '  Ribot,  who  had  become 
Minister  of  Finance  when  their  report  wa';  submitted,  pro- 
nounced what  is  no  doubt  the  correct  verdict :  "  Sucu  a  con- 
ception as  theirs,"  said  he,  "is evidently  inspired  by  an  idea 
of  justice  ;  but  we  must  judge  a  reform  by  results  rather  than 
by  intentions.  From  this  point  of  view  we  do  not  think  that 
the  putting  into  practice  of  the  system  elaborated  by  the 
e.xtra-parliamentary  commission  would  respond  to  the  hopes 
engendered  by  the  promises  of  a  general  tax  reform."  ^ 

At  about  the  same  time  as  the  report  of  the  extra-parlia- 
■  .ntary  commission  the  parliamentary  committee  referred 
to  above,  which  had  also  been  at  work  for  u  year,  made  its 
report,  writt'  a  by  Cavaignac.  This  report  came  out  strongly 
in  favor  of  a  progressive  lump-sum  tax."  Cavaignac's  proj- 
ect, however,  was  opposed  by  Cochery,  as  well  as  by  Ribot, 
and  was  tabled  by  a  rather  close  vote.  Ribot  then  decided 
to  try  his  luck  and  introduced,  in  October,  1895,  a  scheme 
uhich  in  reality  did  not  differ  greatly  from  that  of  one  of 
his  predecessors,  Hurdeau.  Ribot's  Expos^  dcs  Motifs  con- 
tauis  an  interesting  discussion  of  the  three  diffe*-eut  types  of 


'  '•  Dans  I'ame  de  ces  ec-noniiste-;.  la  statistiiiue  avait  desseche  renthousiasme  ; 
ils  rcmplircnt  Icur  tache  en  o.n>w^ncc,  nais  sans  le  I'ui  (jui  trion-.iihe  ilcs 
obstacl-'s  ;  k-ur  s^cplicis;i>o  Its  t;!.iva-  I'h'U.s.jphcs  reunis  autimr  il'un  tapis  vert, 
prts  ue  tims  manqucrcnt  ilc  ce  stiinul.int  <|ui  vivilr;  les  <lclials  parlenu-ntaircs : 
riilontite  (k  I'intcrOt  pcrsnnncl  et  <lc  I'intcrOt  {general;  s.ivants  hahilues  a  la 
criti(|uc  universclK-,  ils  criti'iutrcit  leurs  jiroiircs  (ipir.iuns  ;  thcoricicns  du  doutc, 
ils  di.utcrcnt  do  It-ur  prupre  ;uj{cmtMu  ■  le  diisir  de  circuns])eclinn  les  rendu 
tiniiircs  ;  la  erainte  de  Taventure  les  iinmubilisa.  Ce  (;ui  leur  fit  Ic  jilus  defaut 
fut  ee  i|u'ils  mcprisaient  le  plus:   la  politique."  —  Caston-C.ros,  p.  424. 

-  "  Lne  pareille  cunception  s'insi)ire  evidcminent  d'unc  idee  de  justice  ;  mais 
e'est  d'apres  ses  resultats,  hien  plus  cpu-  d'.ipr.'s  I'iiitentiun  <iui  I'a  inspirii  ,  .pi'une 
rcf...ine  dutt  etre  lujjee,  et  a  ce  p'^int  ile  vue  n  us  no  pensoiis  p.\s  que  la  niise  en 
jiraliiiue  du  systiiiie  elali'ire  par  la  eornmissinii  extrajiarU  nuntaire  repdndrait 
au\  esperanees  c|u'iint  fait  nattre  les  promesses  de  refuriue  f^enerale  de  I'iinpot." — 
Viojft  de  Iah  for/iiiit  Supfifssivn  Ue  la  Conini tilioii  des  /'orlrs  ct  Fniilres  ft 
Tuimprmition  de  ii  Conliihulun  I'l-ru'iiiielU-Mobilure.  Chanilire  des  De- 
putes, Session  K\traordinaire  de  iN<»5.  ""•  '5<JO-  l'=i"*'  Iniprimerie  Natiunalt-, 
i8i»5,  53  lip.     See  pp.  3-4. 

•'  l-..r  a  desi-ripticm  uf  this  rejHirt,  see  Philippe,  pp.  241-244;  Gaston-Gras, 
I'P-  523-5-4;   a"'l  Kenuult,  p.  59. 


i     I 


The  Income   Tax  in  France 


303 


I 


income  tax,  as  well  as  a  treatment  of  the  question  whether 
a  new  income  tax  should  be  added  to,  or  should  be  a  substi- 
tute for,  the  existiui;  taxes  {impct  ,-  ~^'!'it/-("iitioii,  as  com- 
pared with  i>np6t  dc  riinpliucnicnt  .  I'hc  snv.ilt,  income  tax 
he  characterized  as  an  entirely  ui  e  •  uablc  coiicqition  in  a 
great  modern  state.  A  stoppaj^e-a,  .  ••  mc  or  sche'U.ie  tax  ui 
opposed  because  he  maintained  that  under  -f  pablic  charges 
could  not  be  distributed  with  the  justice  that  modern  demo- 
cratic society  demands.  The  lump-sum  income  tax  he  con- 
sidered impracticable  because  "perfect  fiscal  honesty  is  an 
exceptional  virtue."  Accordingly  he  based  his  project  largely 
on  a  moulfication  of  the  coiitiibiiiion  ptrsonuclli-inobilitrc, 
which  he  characterized  as  the  true  French  form  of  the  tax 
on  income.'  Ribot's  scheme,  however,  met  with  scant  favor 
from  rarliament,  and  the  deputies,  after  the  long  vacation  in 
which  they  had  a  chance  to  consult  the  temper  of  their  con- 
stituents, incontinently  voted  it  down  and  thus  brought  about 
the  resignation  of  Ribot. 

The  new  Minister  of  Finance,  Doumer,  was  enthusiastic- 
ally greeted  when  in  F\"bruary,  1896,  he  introduced  his  bill  for 
a  general  lump-sum  income  tax,  embodying  both  progression 
and  differentiation.  His  expose  dcs  viotifs  is  a  long,  well- 
considered  treatise  on  the  topic.-  The  project  was  referred 
to  the  budget  commission  presided  over  by  Coch(l>ry.  The 
valuable  and  interesting  report,  howeve.,  was  written  by 
Delombre,  and  proved  to  be  adverse  to  the  scheme.'     The 

1  rrojtt  ./<•  kn,  t-tc.  [fur  full  tilU;  sre  sti^ra,  p.  .pj].     (/  esp.  pp.  j,  4,  5,  and  15. 

'^  J'rojet  r/.  /.'I  >,/,i.'i/  i'H.t  i'onlriVHlioni  Pir:,tts  tl  .;«.<  Ta.xfS  y  assimiliii 
Jt  r r..xcic,\  1^07.  I.' hnpol  sill-  Ic  l\,:<-iti(.  I'.iris,  Iiiiprinurie  N.iliunalc,  1896. 
,\  comp.ir.itive  >tu(lv  nf  live  prdjoits,  th'"io  nf  tlu-  fxtia-parli.micntary  cDiniuis- 
si.>n,  ..f  Kili'.t  ill  1S115,  .if  Doumer  in  iS.jd,  of  Maujan  in  190.5,  anl  of  Kouvicr 
in    I'lOj,  will  be   found  in   I'.   Duclos  /,'.'w/,;/  nir  I,-  Rc.enu.     Paris,   1904,  pp. 

^  Kaf'f'or!  ,111  nom  Je  hi  CoiniiiDsioii  Ju  lUdt^el  ,h,nx'f  •/':■>'"•! nif  U  rroift 
,le  l.oi  pvrtui:/  l-,'.it,.,i  du  li:iu'^,!  i;'ii'i\:!  .!,■■  /'/.«.«  ,/  ,.'>.(  A>,  ,■.'.'.■■  Jc-  i'.'.x- 
ii,,\  /^i;/.  (/.Wmfut  siir  /<■  h\i nni.)  Tar  M.  Taul  lielonilire.  I'hamhre  des 
')eputes,  Sessi..n  de  i.S9»>,  no.  iSjl,  p.  (14.  I  Ins  report  of  lielomlire  eontains 
at  the  el  'se  a  full  list  of  all  the  ineonie-ta\  projeets  whieh  had  been  presented 
up  lo  iialc. 


I 

I 


304 


The  Income   Tax 


% 


rejwrt,  wliich  was  followed  by  the  introduction  of  several 
independent  income-tax  bills  such  as  those  by  Chcnavaz  and 
by  Berteaux  and  some  companions,'  led  to  what  promised  to 
be  an  interesting  discussion  in  the  Chamber.'-'  This  was, 
ho.vover,  cut  short  by  the  fall  of  the  Hourgeois  government 
and  its  replacement  by  the  Meiine  ministry,  with  far  less 
radical  ideas. 

The  new  Minister  of  Finance,  Cochery,  accordingly  intro- 
duced, in  June,  1896,  an  income-tax  bill  resting  largely  on  the 
conclusions  of  the  e.xtra-parliamentary  commission,  based 
primarily  on  luiglish  rather  than  German  models,  and  intro- 
ducing in  the  lowest  sched-Je  or  category  of  income  a  taxe 
d'habitalion,  or  improved  rentals  tax.''  Cochcry's  bill  was 
referred  to  the  budget  commission  which  brought  in  a  full 
and  valuable  report  written  by  Camiile  Krantz,  and  which 
was  adverse  to  the  scheme.*  In  February  of  the  following 
year,  1897,  Cochery  introduced  a  similar  bill,'"'  and  when 
Peytral  returned,  after  a  ten  years'  absence,  to  the  ministry 
of  finance,  he  in  turn  submitted,  in  October,  1X98,  a  scheme 
which  differed  entirely  from  his  original  p,  a  of  1888,  and 
which  now  was  based  entirely  on  external  criteri  i,  very  much 
like  Pitt's  Triple  Assessment  in  1798. 

These  waverings  of  the  government  between  the  legal- 
presumption,  the  lump-sum,  and  the  stoppage-at-source 
income  tax,  were  reflected  in  the  legislation.  Almost  every 
year  similar  bills  were  introuuced,  and  many  of  them  sent  to 
committee,  only  to  be  rejected  one  after  another.  These 
schemes,  based  more  or  less  on  external  criteria,  were  pro- 
posed by  Ducos  in   1896,  by  Malzac  and  Gcllc  in   1897,  and 

1  For  these  liills,  toRether  «;•  .  Expoih  Jes  Moli/s,  see  tlie  I'ublications  of  the 
Chambrc  ik-s  DeinUe<,  Session    .e  iS.yo,  ikjs.  1.S50  ami  iSOo. 

-  For  tlio  'liscussioii  see  I'liilippe.  pp.  255-2^0. 

■i  l'\.r  tucliery's  scheme  see  Kennult,  pp.  64-().S,  aii>l  Philippe,  pp.  290-30I. 

*  Kiifi'orf  fait  ,iu  n,vn  de  la  Conimis^uiii  dit  Bii,i);t:  cha'-gh  ,ftxaminer  It 
I'n'ift  Jc  l.ni  lelalif  .'.ux  Jmpdts  Directs  sur  /iS  h'r-.rnui  ft  aux  Taxe^  y  aisimi- 
hes  lie  n-xerdce,  jSq-.  P.ir  M.  Cainille  Krantz.  Chambrc  des  Deputes,  Ses- 
sion 'L'  iS'ic,  nu.  1951,  no  pp. 

''  lor  ibis  see  Renoult,  p,'.  72-73. 


Tlic  Incoitii    Tax  in  France 


305 


by  Massabiiau  in  1899.'  The  lump-sum-income-tax  idea  was 
represented  by  the  bills  of  Cavai^^nac  in  1897  (but  with  the 
partial  use  of  the  lej;al-presumption  idea),  of  Klotz  in  1898, 
and  of  Magniaude  in  1899.  The  schedule-income-tax  projects 
were  submitted  in  bills  of  Doumergue  and  of  Guilleniet  in 
1896.  Finally  the  old  idea  of  a  general  property  tax  was 
represented  by  bills  of  Linard  and  Mahv  in  1896,  of  Rose  in 
1899,  and  of  Menier  in  1899.- 

The  public  was  gradually  being  educated  to  the  urgency' 
of  the  question.  During  the  nineties  not  onl\-  did  official 
publications,  like  that  of  1895,  give  the  facts,  but  some  of 
the  parliamentary  reports  were  republished  for  general  circu- 
lation. Writers,  like  l)e  Swarte  in  1893,  I'hilippe  in  1894, 
Lu(^ay  in  1896,  and  Muller  in  1901,  went  more  or  less  fully 
into  the  history  of  the  subject.''  The  general  literary  discus- 
sion also  waxed  warm.  Passing  over  the  articles  in  the 
periodicals,^  we  now  find  books  devoted  to  the  subject  by 
Kergall,  Doumer,  Trouille  and  Philippe,"' as  well  as  numerous 
pamphlets.*'     But  the  economists  as  such  were  still  opposed, 

'  For  these  see  Gaston-(iros,  pp.  524-528. 

'  For  these  various  schemes  si  e  Keiumlt,  pp.  72-75. 

•''  Cf.  De  Swarte,  /.' Imf-'it  sur  /.••  A'r-:iii:t  iliuoritjue  et  l.'gislafion  Corn- 
pay,'/.  r,iris,  I.Si);  ;  rhilijipe,  /.'/«//.;/  my  if  A'r:  11:1.  Paris,  1S94  ;  [.m^ay, 
J'Impot  C'n'riil  !ur  !e  Keietiu,  <int'  /<•  /'.m('  et  h  f'y  se>t/,  Paris,  iSofi  ; 
Miller,  I.'Iiitpdl  siir  le  Kcvenn  et  sa  /.I'^i-Jii/ion  iiiin  /i  •  /Tii ;  y.t  /';',;.     Paris,  1901. 

♦  .\mung  the  must  important  articles  iiuw  be  noted:  tiiile,  "  l.;i  Psycluilogie 
et  rimpot  sur  le  Kcvenu,''  Rt:ut'  ii'  /-'.iOHl  mie  /\'.'i/r/:i,-,  1SS9;  1 1.  I)a\iilson, 
"  I,'lni])ut  sur  le  Rcveiui,"  ;/'/,/.  i.S  ti  ;  K.  He  W.^nis,  "De  I'liaprit  sur  le 
Revenu,"  AVr  «c  t'oitti-iur  et  I'ny.'iaiumt.uye,  1S05;  I..  Arnau,!,  "1,'Inipot  sur 
le  Kevenu  .Tppliipie  a  Verviers,"  ;/'(./..  iSuo;  .\l)l'i'  Ferret,  •' l.'lniput  sur  le 
Revciiu."  /,'  .!•>,',  I. :!ii>ii  (■////, i/;,y«,-'.  iSii;;  N.  I'rc  lerikst  n,  "l,c>  Piiiuipes  et 
la  l'ralii|ue  de  I'lnipot  ( n'neral  sur  le  Kcvenu  et  la  Pri>]iricte."  /e  .lA'x,/,-  Econ,^- 

le  Kcvenu  cf   Ics  Socialistes."  j// 


tqut,   kSijO  ; 


A.  l.ie 


•  l.'Impnt 


iSgo 


H.  Parliaux.  "  De  I'hnpot  sur  1<'  Kcvenu  a 
tique  et  I\iyUmenl,iiye,  iSdS. 


Mc 


Kcrj;all,  H Inif'M   /It'iiioiyiitiiiue  su 


<■  I,-  a; 


au  X\'e  Siecle,"  A'e7  ue  Puii- 


1S96  ;    r.  Do 


7.'//«/ii/  stiy  /(•  A'e;e 


r. 


ris,  I, Si  ill 


K.  Ti 


1897;    Ch.  I'liilippc,  AVw/,;/ 


/f  A\rtiiii. 


Par 


iSiS. 


Cf.  le  I'rojft  a' Imf^at  my  If  A'rreii 


a'fT.nrt  /./  /Vv 


/■, 


/e  A'e: 


p>t^mi,/iie 


et  /•'/«. 7»;- 


tii-ye,  1905:    Rochard,  AWoyiu-  AV;,//.  ;/  ./^  !' I"ir'l t">'  I' ■^•/•'t'''">  '!'  I' l'>ip(<l  my 
ie   Keienu,    1894;    Uupoiit,  /.r   i'l^yei  U'l'u^'ul  tW    <<    At.i/...,    I5>(6,     i  uuiiucl, 


3o6 


The  Income  Tax 


as  can  be  seen  from  the  title  that  Leroy-Heaulieii  chose  for 
his  chief  fuhnination;  >  while  M.  Jules  Roche,  then,  as  now, 
ona  of  the  uncompromisinfj  ojjponents  of  the  system,  pub- 
lished in  1896  a  book  in  which  he  collected  a  large  number 
of  articles  written  originally  for  the  Fit^aro,  and  in  which  he 
attempted  t  .  draw  a  warning  lesson  from  the  experiences  of 
the  ancini  irgiwc  and  the  Revolution.'^  The  country  was 
gradually  waking  up. 


§  7.    From  Caillauxs  First  Ministry  to  his  Second, 

With  the  new  century  the  interest  in  the  discussion  grew 
in  importance.  Although  the  advocates  of  the  income  ta.x 
were  still  in  the  minority,  their  numbers  augmented  from 
year  to  year.  In  1899,  under  the  ministry  Waldeck- 
Rousseau,  M.  Joseph  Caillaux,  who  was  destined  in  a  second 
ministry  ten  years  later  to  carry  to  successful  completion  an 
income-ta.x  scheme,  became  minister  of  finance.  A  few 
months  before  his  appointment,  and  while  still  a  deputy, 
Caillaux  had  submitted,  in  March,  1899,  in  a  committee 
report  a  project  for  an  income  tax  very  similar  to  that  of 
Teytral,  but  combining  declaration,  official  assessment,  and 
the  use  of  legal  presumption.^  When  he  became  minister, 
Caillaux  introduced  a  bill  for  an  income  tax  designed  to 
replace  the  existing  door  and  window  tax,  as  well  as  the 
pcrsonHclli-mobilurc.  It  was  a  combination  of  a  direct  income 
tax  with  one  resting  on    outward    presumptions.''     The  bill, 

i:imp{,t  siif  U  /<,■-, nil  GM.il  ou  la  T.uli  rf>>i'i.if:,-,  iSq;;  Sarrault,  f  tmf,;t 
J'ri]i^'>yss!/  iiir  !f  Ke-eiiu,  lS,,S  ;  Cuurun,  i: Impot  iur  U  Ker.nu,  1S91);  M.iii- 
chc/,  I'liiipdt  uiii'iiil  nil  li-  /\,7fnii,  iSo'i. 

'  "  I.a  MystitK-ation  -lii  I'r.ijct  .I'Impr.l  Ccmir.-il  sur  Ic  Kt-vcnu,"  1.' fuonvniiste 
Framah,  1S96. 

-  Conire  r tiiipi'if  sur  !,'  AVri'Hrt.      I'ar  Julos  K.kIic.      I'aris,  i8')6. 

•'  ("ja5lon-<  irus,  |i.  527. 

*  fivjet  ,/,■  I-oi  poitiiiit  K'h^ime  U,-s  Ciii/>ii''titi,'ii<  IHrctfi  pi  riiti  •111  noiii  ,// 
,!/■.  Xw/A-  !  oiilu't.  fr  <ultHl  ,/f  1,1  h\Pii/'!i,/iir  /  i.iii^ai-,-.  I'ar  M.  J.  Ciillaux, 
Miiusti-e  lies  I'inanccs,  Chambrc  dcs  Deputes,  Sessiuii  dc  lyoo,  no.  1OJ4,  loO  y\>. 


The  Income  Tax  in  France  307 

however,  did  not  find  favor  with  the  special  commission 
charged  to  consider  the  scheme  together  with  several  of  the 
other  jjrojects  mentioned  above.  The  commission  was  pre- 
sided over  by  Rouvier,  but  the  excellent  report  was  written 
by  Pierre  Merlou,  and  leaned  rather  to  the  lump-sum  idea.' 
The  budget  commission  of  1901  recommended,  however, 
that  some  income-tax  scheme  be  included  in  the  budget  of 
1902,  and  a  sub-committee  was  intrusted  with  the  duty  of 
working  out  a  project  for  a  progressive  lump-sum  income 
tax.  But  Caillaux  was  not  ready  for  the  scheme,  and  because 
of  his  opposition  it  was  dropped. 

After  Caillaux's  retirement  from  office  the  disinclination  to 
anything  looking  like  inquisitorial  i)rocedure  became  so  strong 
that  in  1903  Rouvier,  who  was  then  minister  of  finance,  ad- 
vanced an  income-tax  proposition  based  very  large'y  on 
rentals.2  Rouvier,  as  minister,  had  changed  considerably 
from  Rouvier  the  d-puty,  who,  it  will  be  remembered,  had 
introduced  in  1874,  and  again  in  1S77,  projects  for  a  lump- 
sum income  tax.  He  now  found  much  to  admire  in  the  old 
system  which  he  ther  so  strongly  opposed.  The  essential 
shortcomings  of  this  entire  theory,  however,  wcie  emphasized 
by  Poincare,  a  little  later,  when  he  called  attention  to  the  fact 
that  every  such  scheme  that  had  ever  been  submitted  to 
Parliament  had  suffered  shipwreck  because  all  the  attempts 
had  moved  in  the  same  vicious  circle  ;2  and  Caillaux  declared 
that  there  was  no  formula  more  false  than  that  of  legal  pre- 
sumption.    It  was  precisely  because  the  outward  signs  were 

'  Kiipport  fait  ail  noni  J,-  la  Commission  ,/,-  i' Impel  sur  le  iuienii  Jiaigee 
J'txaminer  Us  Projets  el  Propositions  le  l.oi  porlant  fjahlissemnit  J'liii  Impdt 
C'lural  stir  te  Pevfnu.  Par  .M.  Pierre  Merlou,  Chanilire  <lfs  I)ejiut6>,  Sessiunde 
1901.  no.  2365,48  pp. 

■-'  /^rojit  lie  lot  portant  Siipprfssion  ifes  Couhihuihan  Pi'sonihi'li-.'l/oMHh-e  et 
i/fs  Porles  et  Fenetres  el  fitablissement  ii'un  Impot  C'n.'ial  Mir  It  Pcrtiiii  {ren- 
:vi.  .>  la  Commission  ile  /.,'giiiation  /-isia/i-j,  present,'  an  nam  de  M.  l-.mil 
I.ouhet,  president  ,/<•  /,;  R.'publiiiue  Iran^ai^f.  I'ar  M.  Rcuvicr,  Mlnislre  ,lcs 
Finances.     Chainl)rc 


Depu 


nire  ue 


1903.     Paris,   Imprimerie  Natiunale,    1904,  36  pp.;    an^l  Annexe  to    the   alxne, 
Hi  J..  1904,  15?  pp. 

^  Chambre      s  Deputes,  Seance  of  July  12,  1906. 


II 


3o8 


The  Income   Tax 


so  dereptive  that  the  whole  question  of  French  taxation  was 
so  unsatisfactory.'  The  more  radical  members  of  Parliament, 
however,  were  ready  to  go  further,  and  introduced  bill  after 
bill  for  a  direct  income  tax.  Thus,  apart  from  the  committee 
report  of  Merlou  in  1901,  special  attention  must  be  called 
to  the  schemes  of  Magniaude  and  of  Lacombe  in  1902,  and 
of  Hrun  in  Kjjoi.  while  Maujan,  with  whom  we  have  become 
acciuainted  above,  came  back  to  his  favorite  combination  of  a 
property  and  income  tax  in  1903.  and  again  in  1904.''  AH 
these  bills  were  referred  to  a  committee  presided  over  by 
Merlou,  which  brought  in  a  voluminous  report,  as  well  as 
a  supplementary  report,  both  written  by  Renoult.^*  Nothing 
daunted,  however,  both  Maujan  and  Magniaude  submitted 
new  bills  with  still  more  vigorous  exposi's  dcs  motifs  in  July, 
1906,  and  Malvy  also  added  a  new  bill. 

Sn  pronounced,  however,  was  the  general  trend  toward 
radical'ism  by  this  time,  that  the  government  considered  the 
time  to  have  come  for  a  determined  forward  step.  In  the 
election   of    1906,    263   successful   candidates   had   declared 

1  "  Te  n'hesite  pas  a  .lire  qu'il  nV  a  pas  de  fi.rmule  pi  is  faus^e  quo  oelle  ,!e 
I'imnR't  sur  le  rev.nu  foM.le  sur  les  s.gnes  exterieurs.  Ce .  ont  on  se  plaint,  ce 
qui  fait  con.!a,nner.  par  tous  ceuN  qui  savent  ces  qu.-t  ons,  notre  syst.me 
d'impCts,  c'est  precisement  quil  repose  sur  .les  presompti.  .  s.  .ur  Us  .n<l.ces  les 
plus  decevanw.     Taxer  k'S  real.tes  Jircctoment  mesureeb,  cVst  la  sul.stancc  .le  la 

ref.rme.     On  ne  fait  rirn,  .>..  p   v""'^  'l-'  '«=  '^a'""  ''''"•'  '*  '"'■'^'■'  '"■'"''''  ''"'\ 
„n  sugg^re  .le  remphcer  .les  imp.'ns  s.r  '-  :,!,;:■.:,  exterieur,  par  d'autres  nupSts 
sur  d'autres  signes  exterieutes."     See  Gaston-Gros,  p.  137. 

■-  Lacoml.e's  scheme  contains  an  interesting  exposi  <ies  molifi.  See  rrapcsitton 
J,  1 01  avani  four  Oi;>t  J'  Uibln  un  Impit  G:n:,^il  sur  h  AWf»u.  I'resentee 
par  M.  I-ouis  U,  ombe.  Chambre  <le8  Deputes.  Iluitieme  Legislature,  Session  le 
1902,  im.  ir     (•/;  aUo  Gaston-(;ros,  p.  520. 

3  A'o^forf  fait  an  nam  dt  la  Comm,<.ion  dt  la  i:^,dalion  HuaU  charge 
d',v.,m,„er  !,■  I'r.yel  de  / 0,  el  Us  dners,.  /'ropouCons  de  I o,  .nant  four  ohjet 
d':iat.l,r  ,„,  Impit  Ghural  sur  le  Rnenu.  I'ar  M.Rene  Ron..ult.  (  hambre  .le 
Depute.,  Session  .le  1904  n.).  1799.  <^>'  VV--  =""'  ^V/"''  SuppV<„n,ta,re  Jaxt 
au  nom  de  la  Commission  de  I.efpslatien  l-tscale  eh.trg;,  d'examtner:  I  / es 
Pro/ets  de  tot  portant  Suppression  des  Conlrilmtions  Personnelle-MoHlure  et  des 
Partes  et  Fenfires  et  Atahl,sstme»l  d' „n  Impot  (..'wral  sur  le  h'erenu:  2'  les 
Y,,:.,.:..,  /v„.*.oc.V..V.«.'  de  'o,  ,  .  ■  ay„:it  Snr  Ohiet  d'.tahtir  un  Impit  sur  le 
Ke-enu.  I'ar  M.  Kene  Konoult,  Chambre  des  Deputes,  Session  tAtraor.lmaire 
de  1904,  nu.  2097,  l()  pp. 


Tkc  Income   Tax  in  France 


309 


themselves  in  their  election  platform  for  a  direct  income  tax  ; 
150  had  stated  tlK;.  they  believed  in  a  radical  reform  of  the 
existing  system,  and  only   166  remained  silent.     In  the  new 
ministry  formed  by  Clemenceau  in  October,  1906,  the  port- 
folio of  finance  was  offered  to  C-iilhmx,  v  ho,  it  will  be  remem- 
bered, had  occupied  a  similar  position   under  the  VValdeck- 
Rousseau  ministry  from  1899  to  1902.     His  immediate  prede- 
cessor, Poincare,  had  not    been  able  to  effect  any  agreement 
with  the  IJudget  Commission,  and  the  new  government  was 
now  called  upon   to  fulfil  its  election  promises.     Caillaux  had 
gradually  solidified  his  opinions  on  the  subject.     Although 
originally   in    favor  of  an   impdl  indiciairc,   he    took  strong 
ground,    in    criticising    Rouvier's    plan    several    years    later*! 
aganist  the  system  of  legal  presumptions,  and  expressed  his 
preference  for  the  British  system.'     As  early  as  uSgg  he  had 
manifested  his  repugnance  to  the  German  system.     "  Let  us 
hasten  to  state,"  said  he,  "that  in  theory  the  German  income 
tax  is  almost  perfect.     LInfortunately,  the  weak  spot  is  pre- 
cisely this    ideal    mode    of    assessment  —  the   declaration  — 
which  in  practice  leads  to  the  most  unsatisfactory  results."  ^ 
In  a  public  speech   of  April,    1906,   while  still   a  deputy, 
Caillaux  clearly  explained  his  present  views,  and  this  speech 
led  Clemenceau  to  offer  him  the  portfolio.     "  We  must  not 
think,"  said  Caillaux,  "of  replacing  the  direct  taxes  only  in 
part.      If  we  were  to  touch  one  or  two,  all  would  crun.oL. 
What  is  necessary  is  their  entire  renovation.     We  must  un- 
derstand that  taxes  founded  on  external  signs  of  wealth,  on 
the  .system  of  presumptions,  have  had  their  day  ;    that  their 
injustice  condemns  them,  and  that  we  must  replace  them  by 
taxes  on  actual  income  or  on  capital,  in  part  on  one,  in  part 

'  Une  Transformation  Sooiali.  .I/;-.  Caill.ntx  it  J.Wmpot  tur  U  Rr.eiiu 
txpliqu,i.  Par  Gerauil-Iiastft,  I'aris  n.  d.  'iU)0()\,  p.  103.  This  lun.k,  which 
Cunt.iins  a  schedule  of  Caillaux's  career  leading  up  to  the  passage  uf  the  iiicome- 
tax  law,  will  hereafter  be  quoted  .^s  UhaUiZ-Baittt. 

l-.mprtssntK-nous  de  const.iter  (|ue,  eii  Iheorie,  Timpot  sur  le  revenu  alle- 
maiid  est  t.-es.|ue  parfajt.  .  .  .  Malheureusement  la  pierre  d'achoppcment,  c'est 
pieciMl-iiient  CO  m.Hle  d  assi.tt,:  i,leal  -la  de.larati.)n)  cjui,  dans  la  pratique,  con- 
duit   


\  w 


es  re-ultats  Us  plu»  msdiocres.' 


ijuotej  in  Gaston-Ciros,  p.  286. 


i  ■ 

If 


310 


The  Income   Tax 


on  the  oth.r.  In  order  to  be  at  once  equUab  e  and  produc- 
tive and  in  order  not  to  allow  too  lar^e  a  place  for  fraud, 
theie  taxes  must  be  organized  by  schedules,  and  must  reach 
incomes  at  their  source."  * 


§  8.  Caillauxs  Income  Tax  Bill  of  1907 
Clemenceau,  in  accepting  office,  outlined  the  general  plan 
of  his  ministry  and  made  the  statement  that  the  governme.U 
would  soon  s'ubmit  the  project  of  a  law  prov.dmg  for  an 
entire  reform  of  the  existing  tax  system,  which  was  no  longer 
adapted  to  the  conditions  and  the  new  forms  of  private  weaWi. 
Accordingly  Caillanx  set  to  work  at  once  to  elaborate  h,s 
scheme,  and  on  February  7.  I907.  the  now  famous  bill  for 
an  income  tax  was  introduced. 

Cailliux's  cxpost'  dcs  motifs  was  an  admirable  one,^  and 
may,  in  some  respects,  be  compared  with  Gladstone's  famous 
pronouncement  of  1853.  The  essential  difference,  however, 
is  that  whereas  Gladstone  had  the  task  of  dispellmg  the 
preiudiccs  and  changing  the  convictions  of  his  hearers.  Cail- 
iaux  was  reasonably  sure  that  almost  any  income-tax  scheme 
that  might  be  formulated  by  the  government  would  secure 
the  suffrages  of  the  majority  of  the  House. 

Startinc^  out  with  a  theoretical  discussion  of  the  general 
basis  of  "taxation.  Caillaux  contrasted  the  benefit  with  the 
faculty  theory.  Although  he  declared  his  individual  ad- 
hesion to  the  latter,  he  pointed  out  that  it  makes  little  dif- 

i"(ln  ne  pout  songer  a  partiellement  rempiacer  les  impots  directs,  en 
t.uchant  a  un  ou  .kux  on  ferait  tout  crofller  ;  c'est  leur  renovation  totale  .|m 
s'in„,„se.  11  faut  comprenare  que  les  impots  fon.les  sur  les  signes  exter.eurs  .le 
h  richc.se,  sur  le  svsteme  <lcs  in.lices,  unt  fait  lour  temps,  que  leur  injustice  les  fa.t 
con.lanmcr,  nu'on'aoit  leur  suhstituer  .Ics  impots  sur  le  revenu  reel  ou  sur  le 
capital,  parfois  sur  Vun  et  sur  I'autre.  Pour  5tre  a  la  fois  e,,uitahles  et  pro.luctives 
pcnir  ne  pas  faire  la  place  trop  large  a  la  fraude  ces  impots  devront  etre  organises 
par  ceduks  ;  ils  devront  atteindre  ks  revenus  \  leur  source.' 

^^cchispronounct:nientin(;-rn.:d.1«astet.p.  87-         ■  ,     ,       „  , 

3  It  will  be  foun.l  in  full  i.'  t;eraud.l5astet.  pp.  1 58-203.     (/  also  Ktvue  dc 
Sciime  et  de  I^gidation  Financitres,  1907,  pp.  78  tt  jcy. 


-'^m^^'t.' 


The  Income   Tax  in  France 


3" 


fercnce  which  doctrine  one  espouses,  in  the  face  of  the  exist- 
ing system  of  indirect  taxation.  For  all  fiscal  theorists  agree, 
he  th  light,  in  demanding  that  the  old  system  of  indirect  taxes 
be  modified  and  that  mor-'  stress  be  laid  on  the  wealth  of  the 
opulent  than  on  the  expenditure  of  the  poor.  All  great  na- 
tions, with  the  exception  of  P'rancc,  have  taken  part  in  this 
development,  and  the  French  system  of  direct  taxes,  a  prod- 
uct of  forgotten  theories  or  of  abandoned  traditions,  is  to-day, 
he  contended,  an  antiquated  and  disparate  organism,  utterly 
out  of  touch  with  modern  institutions.'  Taking  up,  one  by 
one,  the  French  direct  taxes,  he  subjected  them  to  a  withering 
criticism.  The  land  tax  falls  with  crushing  severity  on  the 
peasant  and  small  farmer.  The  patcntcs  or  business  taxes 
give  rise  in  practice  to  the  most  shocking  inequalities.  The 
door  and  window  tax  is  a  tax  on  air  and  light.  The  piysouucUi- 
viobiliirc  has  practically  become  a  tax  on  expenditure,  like  the 
indirect  taxes  on  sugar  and  coffee.  The  tax  on  securities, 
which  constituted  the  first  serious  attempt  to  improve  the 
general  system,  has  in  reality  created  unjust  |>rivileges,  and 
has  sensibly  checked  indu.strial  progress.  Every  one,  con- 
cluded Caillaux,  confesses  that  the  system  is  in  need  of  a 
complete  renovation. 

The  solution  found  in  other  countries  is  the  income  tax. 
Brushing  aside  the  impot  indiciairc  as  unworthy  of  considera- 
tion, Caillaux  pointed  out  that  there  are  two  chief  types  of 
income  tax,  which  he  called  the  ivi^  :  rcil snr  les  nvcnits  and 
the  impot  personnel  et  global  snr  le  reventi.  Of  these  two  sys- 
tems the  former  is  represented  by  the  British  income  ta.x, 
which  Caillaux  considered  a  marvellous  fiscal  instrument,  at 
once  potent  and  supple.'^  "  It  is  exceptionally  productive, 
and  yet  it  avoids  as  far  as  possible  contacts,  that  is,  conflicts 
between  the  Treasury  and  the  citizen."  The  chief  objection 
to  the  English  income  tax  he  found  in  the  fact  that  it  does 
not  admit  of  discrimination  and  progression.  For  it  must  be 
remembered  that  when  Caillaux  wrote  these  words  those  prin- 
ciples had  not  yci  been  adopted  in  England.  "The  German 
'  ncr3'.-,.!-l'.3-t.-.,  j--.  •>!.  ■-  OcTnu-l-l'a-tct,  pp.  !65-l66. 


-^-^^i,^ 


I  I 


312 


The  Income   Tax 


system,"  on  the  other  hand,  "  may  seem  to  be  equitable,  be- 
cause the  tax  is  exactly  proportioned  to  every  one's  wealth.  It 
mav  suit  a  hij^hly  centralized  and  hierarchic  country,  and  a 
subservient  and  docile  people.  Hut  it  allows  room  for  much 
arbitrariness  and  inequality  —  arbitrariness  because  the  ad- 
ministration does  not  hesitate  to  make  official  assessments. 
and  to  cut  to  the  quick  when  it  suspects  fraud  ;  much  inequal- 
ity, because,  despite  all,  it  permits  many  incomes,  and  espe- 
cially many  large  incomes,  to  escape,  with  the  consequence 
that  the  mass  of  the  taxpayers  are  relatively  overburdened. 
Above  all,  the  Prussian  system  is  so  little  productive,  because 
it  is  so  little  scientific." ' 

Proceeding  next  to  the  question  which  of  the  two  systems 
to  adopt,  Caillaux  stated  that  in  arriviii^^  at  a  decision  he  was 
actuated  by  two  general  principles;  the  necessity  of  taxing 
actual  rather  than  presumed  income,  which  implies  the  ex- 
clusion of  all  systems  of  external  sign.s  or  presumptions;  and 
the  necessity  of  suppressing  ail  n-ivileges.  These  principles 
once  granted,  the  choice  betwec:  :he  English  and  the  Prussian 
system  becomes  easy.  "  My  fellow-citizens  are  too  fond  of 
independence  to  subject  themselves  to  the  rigors  of  the  Ger- 
manic system ;  nor  would  they  find  it  entirely  easy  to  accommo- 
date themselves  in  all  its  details  to  the  British  system."  ^  The 
ideal,  Caillaux  held,  is  a  combination  of  the  two  systems  suited 
to  French  conditions. 

He  proceeded  thereupon  to  elaborate  his  scheme.  First 
he  urged  the  adoption  of  the  linglish  stoppage-at-source 
system  arranged  in  schedules,  or  what  the  French  call  the 
systtmc  de  stoppai^c.  Owing,  however,  to  the  lower  standard 
of  hfe  and  the  conditions  of  the  distribution  of  wealth  in 
France,  it  would  be  necessary  to  have  the  exemptions  fixed 
at  a  much  lower  figure  than  in  England.  Furthermore, 
Caillaux  advocated  the  system  of  discrimination,  that  is,  of 
having  the  various  schedules  taxed  at  different  rates,  instead 
of  at  the  same  rates,  as  was  then  the  case  in  England. 
Above  all,  the  scheduled  income  tax  is  to  be  supplemented  by 

'  Geraud-lJastet,  pp.  167-168.  -  (iciau.!-i;a«ct,  p.  i6y. 


The  Income   Tax  hi  /• 


rami' 


313 


a  "cuinplcnicntary  tax,"  or  lultlitional  tax  on  large  incomes. 
In  this  way,  provision  will  be  made  for  both  differentiation 
and  progression.  Compubory  declaration  ol  incomes  will  be 
needed  only  in  the  case  of  professional  incomes  and  of  the 
inrome  from  securities.  Finally,  in  the  administration  of  the 
system,  every  care  is  to  be  taken  to  avoid  in(|uisitorial  and 
arbitrary  procedure  It  is  for  this  reason,  said  Caillau.x,  that 
"we  refuse  to  j;ive  the  administration  the  exorbitant  powers 
which  it  enjoys  in  Prussia."  '  In  his  eloquent  peroration 
Caillaux  appealed  to  the  French  sense  of  justice,  and  closed 
with  the  words:  "When  we  begin  to  make  reforms  we  must 
always  expect  to  encounter  the  many  embarrassments  caused 
by  the  manceuvres  and  the  outcry  of  men  of  all  kinds,  who 
are  interested  in  maintaininj^  existing  abuses;  for  there  is  no 
abuse  on  which  some  one  does  not  live.""'^ 

Caillaux"---  scheme  made  a  profound  impression,  and  was 
referred  to  the  commission  of  fiscal  legislation,  which  was 
deputed  to  consider  not  only  this  project,  but  also  the  bills  of 
Maujan,  Magniaude,  and  Malvy,  mentioned  above.  The  com- 
mission, presided  over  by  Camille  I'elletan,  studied  the  project 
carefully  and  made  its  report,  written  by  Kenoult,  on  June 
13,  IQO/.''  Tiie  commission  declared  its  adhesion  to  Cail- 
laux's  project  in  almost  every  particular,  making  only  a  few 
imjiortant  changes.  Of  these  the  most  significant  were  the 
application  of  the  principle  of  stoppage  at  source  to  the 
income  from  securities  also,  and  a  lowering  of  the  tax  rate  on 
agricultural  profits. ■♦ 

'  r,eraiul-Hastet,  p.  200. 

■^  "  ( )n  iliiit  tuujours  s'attuii'lrL-  (|uancl  on  cntrcprcnil  iles  rtforints,  au\  cmbarras 
multiplit'S  '|ue  femnt  iLiitre  los  inan.LUvres  ct  les  tris  iks  huniiufM  ilc  tuute  tsptce 
inteicsscs  ^  iiiainti'iiir  Ics  alius,  car  il  n'en  est  puint  ilotit  (|uel>|u'un  nt-  vive."  — 
(leiauil-Iiastt't,  p.  20 ^. 

■'  Kal'f'oil  :.iit  iiu  lumi  del'  i'ommiiuon  l-'isaiSt  i!iai\^i'e  .i\xoiiiiuer  le  Projet 
et  les  I'ropositioiii  ,/i-  l.oi Itiiliiil  u  1' /-Jill lisifmf lit  li'uii  /iiifot  siir !f  Kt~eiiu.  I'ar 
M.  Kene  Ktiioult.  (  liamhrc  dcs  Deputes.  Session  ile  1907,  im.  105 j,  2  vols., 
304,41s  pp. 

♦  Many  minor  changes  were  made.  .\  Lomplele  list  cf  tluse  changes  will  be 
found  in  liaston-l  iros,  pp  5,!7  539-  1  lie  tax,  a.s  nioililied  liy  the  tnnimissiun 
will  be  found,  //(</,  pp.  547-5S2. 


■'S' ''L^.^1^- 


':V". ;.„-■>■ 


1 1' 


V  ■ 


3»4 


77ie  Income  Tax 


In  the  meantime,  the  ministry  started  to  make  preliminary 
investij;ati<)ns  or  soundings  {sotu/iigis)  as  to  the  probable 
practical  result  of  the  scheme  in  different  parts  of  the  coun- 
try. On  June  25  the  Chamber  voted  by  a  majority  of  309 
to  1 1 1  to  take  up  the  commission's  report  on  July  1,  and  ac- 
cordingly on  that  date  the  general  discussion  began.  It 
last.'d  to  July  1 1  md  was  then  adjourned  during  the  extra 
session  of  1907.  Renewed  at  the  opening  of  the  KjoS  session 
on  January  20,  it  lasted  continuously  until  February  18. 
The  house  then  decided,  by  the  overwhelming  majority  of 
487  to  56  votes,  to  proceed  to  a  discussion  of  the  separate 
articles  of  the  bill,  and  on  March  7,  1908,  this  was  initiated. 
It  occupied  the  remainder  of  both  the  ordinary  and  the  c.x- 
traorilinary  sessions  of  1908,  and  was  resumed  at  the  open- 
ing of  the  1909  session  in  January,  continuing  until  March. 
Each  of  the  one  hundred  and  one  sections  was  subjected  to 
a  fierce  discussion  and  to  a  separate  vote.  In  th*i  course  of 
this  discussion  not  a  few  of  the  provisions  were  changed,  and 
some  alterations,  as  in  the  case  of  the  ta.xation  of  business 
profits,  were  made.'  Finally,  after  further  discussion  of  the 
bill  as  a  whole,  and  the  presentation  of  seven  supplement- 
ary reports  by  the  commission  of  fiscal  legislation,  each  of 
them  taking  up  some  of  the  mooted  questions,'*  the  project 

'  Thi'  cliscussii.n  will  tic  fiund  in  the  .inituaire  ./«  I\iil,ment  fur  I907,  1908, 
1909.  This  annual  volume,  which  has  appeart.l  since  iijoo,  is  eilitcil  by  Rene 
Samuel  anil  ( )c  irj;es  I'lonnct.  An  admir.ihle  summary  i>f  tlie  general  discussiun, 
as  well  as  cf  the  ■liscussion  uf  each  article,  is  f.iuml  in  the  vulume  entitle.!  1." Impot 
siir  U  AV:,H«,  1  ••  Projel  CiilhiHX  luvant  l.i  Ch^unl'.e.  Textts,  Discussions, 
Ci'inment.nits.  P.uis,  1910,  6S0  ])[).  This  vulume  w;>»  publisheil  liy  the  Asso- 
(Uttion  ,lr  I"),  fftisf  Jfs  ('/iissfs  .\f,ty(nn,-s  firmeil  to  (ippuse  the  inccvme  tax  ;  l)Ut 
the  suniniarv  and  the  n.ites  are  perfeclly  impartial.  (  /'.  also,  for  a  still  moie 
aMireviatcil  summary  of  the  liiscussiun,  the  A'fviit  Je  Siieiicf  ft  ,le  IJs^ishition  li- 
n<t)iiUi-.s  ii)o;.  pp.  407,  645  ;    190S,  pp.  2j6,  415  ;    I909,  p|i.  .S5,   521. 

-  Ill  acl.lition  to  the  seven  supplementary  reports  there  were  seven  annexed 
reports,  makiiij;  fourteen  in  all.  The  uihcial  numbers  of  these  J\,:f</<orts  Suf'/'l'- 
mriilinrfi  were  as  follows:  Sessi.m  of  ujoS,  tirst  report,  no.  1445,  .5>^pp..  with 
a  separate  Annexe  entitled  Coi)i[<tcs  A'.nJin  Jei  Ex/'.'riemes  W Application  de 
rimpot  Gen'ral  siir  les  J^e-eniis,  155  pp.;  second  report,  no.  1565,  4  pp.;  third 
report,  no.  1591,  4  p]). ;  fourth  report,  no.  1730,  (ipp.;  with  six  separate  An- 
'frvf?,  3  pp.,  4  pp.,  21  np,  j  pp,  2  pp,  3  pp.  ;    c%t ra.=rdinary  session   of    igoS. 


J  VI- 


J  n 


^% 


The  Income   Tax  in  I'rance 


3'5 


was  adopted  by  the  Ch.iniher  on  March  9,  iqck),  by  the  de- 
cisive \Mtc  t)t  3«8  to  I -'9  present,  or  406  to  \(iCi  revised. 
Thus,  after  a  most  careful  discussion  which  lasted  more  than 
two  ye;irs,  the  I'"rench  Chamber  of  Deiuities  tnially  adopted 
a  general  income  ta,.  scheme. 


§  9.     Tlte  Discussion  of  ignj-jgng 

The  minority  put  up  a  very  stronj;  fight  against  the  bill. 
Among  the  most  prominent  op|)onents  were  Rihot,  Keinach, 
Aynard,  Henoist,  and  I'ierre  Leroy-Meaulieu.  The  chief  an- 
tagonist, however,  was  Jules  Roche,  who  had  been  an  im 
placable  enemy  of  the  income  tax  for  several  decades.  He 
maintained  that  the  tax  would  become  an  instrument  of  social 
warfare  and  of  economic  destruction,  tluit  the  bill  virtuallv 
overturned  the  work  of  the  Revolution,  and  that  it  would  re- 
establish the  very  worst  fiscal  methods  of  the  tiiicicn  ic'i^iinc. 
The  majority  had,  however,  no  dilTiculty  in  answering  the 
various  points.  Not  only  the  leading  liberal  and  radical 
Republicans,  but  also  the  prominent  socialists,  like  Jaures, 
warmly  espoused  the  bill.  The  president  of  the  commis- 
sion, Pelletan,  and  the  rei>orter,  Renoult.  spoke  several 
times  with  great  effect  in  ardent  defence  of  the  project ;  but 
the  lion's  share  in  ujiholding  the  measure  naturally  fell  to 
Caillaux. 

Caillaux  made  no  less  than  seven  great  speeches  in  the 
course  of  the  two  years'  discussion.'  In  his  introductory 
speech  of  July  n,  1907,  he  elaborated  the  points  that  he  had 
made  in  the  cxpost'  t/,s  motifs.  He  dei  hired  that  there  had 
always  been  two  shortcomings  in  the  French  system  —  the 
privileges  in  f  i\(ir  of  cert.iin  classes  or  of  certain  sections, 
and  the  undue  extension  of  indirect  taxation.-  He  contended 
that  a  system  which  worked  fairly  well  at  the  beginning  of 

lifih   report,  no.  21.17,  zS  pp.  •   si's*i>'n   uf  I1JO9,  sixtli  rcpurt,  no.   :;2 -i^,  43  pp.  ; 
siventh  report,  no.  22i)l,  (o  pp. 

'  These  speeches  are  printed  in  full  in  the  volume  entitled  /.  Cmllnix,  /.' Imfot 
sui-  Ic  A',:  ,-iiii,  Paris,  lyio,  yi*^  !'!'•  ^  Op,  nl ,  i>.  <t. 


3i6 


The  Income  Tax 


the  nineteenth  century  was  utterly  unsuitable  f'r  the  twentieth. 
Confessing  that  his  curlier  views  on  the  subject  had  not 
been  thoroughly  thought  out  and  that  in  1900  he  had  been 
much  tempted  to  follow  the  Prussian  idea  of  relegating  the 
real  tax  to  the  localities  and  of  furnishing  the  resources  of 
the  general  treasury  by  a  single  income  tax,  he  now  stated 
that  further  study  had  shown  him  the  impracticability  of  that 
scheme.*  So  again  he  declared  that  while  he  had  been  at 
first  seduced  by  the  system  of  the  British  income  tax,  he 
found,  on  going  to  the  bottom  of  the  subject,  that  that  also 
was  unsatisfactory,  and  for  three  reasons :  first,  that  if  there 
were  to  be  nothing  but  a  scheduled  tax,  certain  classes  vould 
escape,  especially  the  owners  of  foreign  securities ;  secondly, 
that  if  all  the  existing  taxes  were  to  be  replaced  !>y  a 
scheduled  income  tax,  the  rate  in  each  schedule  would  have 
to  be  put  so  high  as  to  make  it  vi  ually  un^^  idurable ;  and 
finally,  that  without  a  knowledge  of  the  entire  income  of  the 
individual,  it  would  under  French  conditions  at  least  be  im- 
practicable to  introduce  the  scheme  of  progrei:sion.  Amid 
much  applause  he  declared  that  the  privilege  of  a  gradual 
evolution  in  one's  ideas  was  perhaps  allowed  to  thooe  who 
work  hard  and  who  do  not  content  themselves  simply  with 
reading  the  Joitnuil  Officicl?  He  took  up  the  objection  that 
his  estimated  figures  as  to  the  yield  of  the  tax  were  not  exact, 
because  the  country's  income  was  not  accurately  known.  "  If, 
on  the  pretext  that  I  do  not  know  with  absolute  certainty  the 
revenues  of  every  Frenchman,  you  desire  to  prevent  me  from 
making  this  reform,  you  will  never  succeed  in  causing  the 
actual  inequalities  of  the  tax  system  to  disappear."  ^  In  reply 
to  the  objection  that  the  owners  of  securities  would  transfer 
them  or  themselves  abroad,  Caillaux  .said,  "  I  am  not  in  the 
habit  of  proclaiming  my  intentions  nor  the  government  nego- 
tiations from  the  house  tops;  but  I  should  advise  my  com- 
patriots who  are  thinking  of  departing  with  a  light  heart  and 
of  taking  their  securities  under  their  arm  to  Switzerland  or  to 
Belgium,  not  to  be  astonished  if,  in  a  short  time,  they  were  to 

'  /.  Oiillaux,  of.  cit ,  \\.  23.  -  Op.  cif.,  p.  55.  »  Op.  at.,  pp.  S^-'>')- 


The  Income  Tax  in  France 


317 


have  a  little  surprise,"^  Referring  again  to  the  obligation 
imposed  on  the  bankers  to  keep  a  registry  or  list  of  their  va- 
rious payments  to  others,  he  pointed  out  that  such  a  list  was 
already  provided  for  in  the  stock-e.';change  tax,  and  had 
aroused  no  opposition  at  the  time.^  Finally,  he  considered 
the  objection  that  the  scheme  was  socialistic.  This  charge 
he  characterized  as  at  once  puerile  and  miserable.  "  Do  you 
think,  gentlemen,  that  it  is  wise  to  state  to  the  country  that 
the  Socialist  party  alone  can  advocate  measures  of  justice? 
Do  you  not  see  that  it  would  be  the  surest  way  of  recom- 
mending socialism  to  a  progressive  democracy?"^  He  con- 
cluded with  an  eloquent  appeal  to  the  Chamber  to  collaborate 
with  him,  through  the  medium  of  a  careful  discussion,  in 
erecting  on  a  scientific  foundation  a  new  fiscal  regime,  a 
"regime  of  progress  and  of  justice,  a  regime  which  will  lighten 
the  burden  of  the  small  man  and  which  will  put  a  moderate, 
although  by  no  means  exaggerated,  charge  on  the  richer 
classes."* 

Half  a  year  later,  on  February  11,  1908,  Caillaux  delivered 
another  great  speech,  in  which  he  rei)lied  to  the  general 
objections  to  the  scheme.  He  again  pointed  out  the  undue 
preponderance  of  indirect  taxes.  In  the  existing  budget  of 
thirty-six  hundred  million  francs,  his  most  recent  calculations 
had  brought  him  to  the  conclusion  that  indirect  taxes  yielded 
from  fifteen  to  sixteen  hundred  millions,  direct  taxes  only 
nine  hundred  millions,  while  the  remaining  two  to  three  hun- 
dred millions  came  from  taxes  which  it  was  hard  to  classify. 
Under  these  conditions  it  would  be  universally  confessed,  he 
thought,  that  a  larger  share  of  the  revenue  must  be  secured 
from  direct  taxes.*  In  an  effective  passage  he  deplored  the 
action  of  those  uncompromising  op|)onents  who.se  objections  to 

ly.  Ciilhux,  of.  n/.,  p.  f>2.  '^  Op.  .il,  p.  S;.  ^  ('/.  <//..  p.  98- 

<  "  Cc  que  le  Rouverncincnt  ilemamie  c'esi  cjue  I.1  (  hambre  veuiHf  tiion  travailK  r, 

collaliorcr  avec  lui,  i.  cdihcr  si.ientilii|iiement  un  nouveau  nifjime  iiscal,  un  rt-f;ime 

(Ic  progr^s,  ilf  justice,  un  ru^i'iie  '!"'  e\nn^re  les  pttili, .nii  chart'e  un  peu  plus  les 

riches  sans  nullt-  exagiratiim  cepen<laut."  —  0/>.  lit.,  p.  103. 

*  ()/.  tit.,  p.  116. 


M 


3i8 


The  Income  Tax 


\  1 


this  scheme  were  just  as  great  as  to  those  of  any  other  income- 
tax  scheme.  "  Judge  our  system  for  itself.  If  you  are  not 
satisfied,  propose  something  else ;  but  do  not  continually 
wrap  yourselves  up  in  a  perpetual  negation  which  takes  the 
shape  of  an  attempt  to  defeat  every  project  that  is  ever 
brought  into  this  house,  in  order  to  retard  the  coming  of  the 
reform  which  you  so  much  fear."  ^  The  adoption  of  a  lump- 
sum income  tax,  to  replace  all  the  existing  taxes,  was  advo- 
cated bv  some.  "  I  declare  flatly,"  said  Caillaux,  "  that  a 
thorough  study  of  the  question  has  convinced  me  that  such  a 
solution  would  be  a  most  dangerous  and  deplorable  leap  in 
the  dark."  "^  To  those  who  demanded  a  servile  copying  of 
the  British  income  tax,  he  made  an  effective  answer  by  calling 
attention  to  the  recent  report  of  the  English  commission, 
which  had  just  recommended  a  supertax  comparable  to  his 
own  complementary  tax.^ 

Passing  on  to  the  opposition's  defence  of  the  existing  sys- 
tems, he  maintained  that  the  business  tax  (patcntcs),  far  from 
being  the  best  of  the  French  taxes,  was  the  most  unequal 
and  most  lacking  in  proportion.*  Again,  answering  the  ad- 
vocates of  the  system  of  taxation  by  legal  presumptions,  he 
said  :  "  You  may  rack  your  mind  as  much  as  you  like.  You 
may  invent  all  the  possible  external  signs  in  the  world ;  you 
may  combine  them  and  intertwine  them  as  you  please  —  the 
day  after  you  have  worked  out  a  law  of  two  or  three  hun- 
dred paragraphs  on  such  a  basis,  the  only  result  will  be  the 
discovery  that  you  have  committed  the  maximum  of  injus- 
tice." ^'-  In  another  place  he  said  :  "  For  a  hundred  and  fif- 
teen years  we  have  been  moving  in  the  same  circle  of 
attempting  to  reach  actual  income  by  outward  signs.     Are 

1  /.  Cail/iiii.r,  i/.  <;/,  p.  129. 

2  "  L'li  s.iut  ilans  rincoiinu,  ilcs  plus  re<loutaliles  et  fles  plus  .l.-ingiTcux."  — 
Op.  at.,  p.  133.  »  (tp.  ,ii.,  p.  I  ^5.  J  Oys.  at,  p.  163. 

''  "  Vous  aurez  boau  vdur  mettre  I'esprit  a  la  torture,  vous  aurtv  beau  inventi-r 
tous  Ics  signes  exterieurs  ilu  nionde,  les  combiner,  les  enchevetrer  a  votre  guise  ; 
le  leiultiiiain  ilu  jnur  nu  vuus  aurez  etabli  une  loi  en  200  ou  300  articles  sur  una 
telle  base,  vous  arrivere/  tout  simplement  a  dejouvrir  que  vous  avez  fait  le  sum- 
mum  ^'injustices."     Op.  (it.,  p.  215. 


Tlu  Income  Tax  in  France 


319 


you  not  a  bit  tired  of  this  little  sport  ?"  >     Taking  up  in 
some  detail  the  question  of  declaration,  Caillaux  pointed  out 
that   compulsory   declaration   was    employed   only   when    it 
was  absolutely  necessary,  and  that  it  was  confined  to  the 
narrowest  limito.^     "  I  am  perfectly  well  aware,"  he  stated, 
"  that  in  fiscal  affairs  we  must  regard  the  traditions,  the  cus- 
toms, and  even  to  a  certain  extent  the  prejudices  of  the  peo- 
ple ;  but,"  he  added,  "  you  may  be  sure  that  when  the  new 
system  shall  once  have  been  put  into  operation,  the  same 
thing  will  happen  here  that  has  happened  in  every  country 
where  a  compulsory  declaration  was  not  required  at  first: 
there  will  be  a  general  change  of  public  sentiment  in  the 
direction  of  declaration  which  is,  in  reality,  the  only  logical 
system,  the  only  really  admissible  method  in  such  matters."  ^ 
With  regard  to  the  complementary  tax,  the  objection   had 
been  made  that  it  would  reach  only  half  a  million  taxpay- 
ers.   "  That,  in  my  opinion,"  said  Caillaux,  "  is  precisely  its 
great  advantage."     He  concluded  by  alluding  to  the  three 
reasons  in  favor  of  his  scheme.     In  the  first  place,  France 
was  about  coming   to  the  end   of   its  resources  under  the 
existing  system  of  taxation,  and  more  money  was  needed, 
especially'for  social  reforms.     Secondly,  the  system  in  vogue 
imposed  an  intolerable  burden  on  the  general  economic  and 
industrial  development  of  the  country  ;  the  new  system  would 
lighten  the  burden.     Thirdly,  the  great  majority  of  the  depu- 
ties had  made  solemn  promises  to  their  electors  to  introduce 
the  new  system ;  they  must  now  keep  their  promises. 

In  his  other  speeches  Caillaux  took  up  some  of  the  re- 
maining important  problems.  Thus  one  entire  speech  was 
devoted  to  the  question  of  the  desirability  of  taxing  govern- 
ment bonds,  a  question  which  Caillaux  answered  in  the 
affirmative.*  Again,  in  considering  the  pioblem  of  progres- 
sive taxation,  he  stated  that  without  taking  any  position  on 
the  general  question  of  the  desirability  of  progression  as  a 
whole,  the  graduated  features  of  his  scheme  could  easily  be 

1  /.  Caillaux.  op.  cit.,  p.  27,?.     Cf.  also  a  similar  passage  on  p.  491 


2  Op.  cit .  ]).  21.5. 


Op.  dt.,  p.  192. 


Op.  at.,  pp.  317-4.1'- 


320 


The  Income  Tax 


defended  on  the  ground  of  a  makeweight  to  the  upside-down 
progressive  indirect  taxes,  which  would  still  remain.  In 
other  words,  Caillaux  contented  himself  with  what  we  have 
elsewhere  called  the  compensatory  theory  of  progressive  taxa- 
tion.i  The  objection  that  if  we  once  insert  the  entering 
wedge  of  progression  there  would  be  no  stopping,  Caillaux 
characterized  as  an  outworn  schoolboy's  thesis.  In  his  final 
spee^n  of  March,  1909,2  he  took  up  again  in  turn  all  the 
principal  objections  that  had  been  advanced  in  the  course 
of  the  two  years'  discussion,  namely,  the  stock  aiguments  of 
inquisitorial  procedure,  of  fraud,  of  the  threatened  flight  of 
capital,  of  socialism,  and  of  reaction  on  the  poorer  classes. 
Particularly  effective  was  his  reply  to  the  last  contention 
that  in  levying  a  higher  tax  on  the  rich,  the  bill  was  really 
imposing  burdens  on  the  poor.  Amid  enthusiastic  applause 
Caillaux  quoted  from  authorities  to  show  that  precisely  the 
same  arjjumctits  had  been  urged  at  the  time  of  the  Revolu- 
tion against  the  suppression  of  the  conn't-s  and  against  the 
abolition  of  the  privileges  of  the  nobility  and  the  clergy.  So 
admirable  was  his  succinct  presentation  that  the  Chamber 
ordered  it  to  be  printed  and  placarded  throughout  France. 

As  soon  as  the  bill  was  introduced,  it  was  at  once  recosr- 
nized  that  a  majority  of  the  house  was  practically  pledged  to 
its  enactment  'nto  law,  and  a  heated  discussion  throughout 
the  country  Kept  pace  with  that  in  the  Chamber.  The  old 
guard,  like  Leroy-Beaulieu,  Stourm,  and  Neymarck,  as  well  as 
deputy  Roche,  poured  forth  their  broadsides  against  the  in- 
come tax  in  the  dailies,  weeklies,  and  quarterlies.^  But  a  new 
generation  of  economists  had  arisen,  who  took  a  different  at- 
titude. These  now  began  to  contribute  most  effectively  to 
the  discussion.  Among  them  were  men  like  Jeze,  Allix,  Gas- 
ton-Gros,  and  Ingenbleek,^  ably  seconded  by  statesmen  like 


'  -"i'lpra,  page  31.  ".  Qp,  dt.,  pp.  465-535. 

•'  ('/.  the  iiumer.iu-  irticles  in  the  fi.coiiomistt  Franiais,  I.e  MonJe  fi.conomiguf. 
Journal  J,i  /?,,>«,)/;;/ t/,T,  /i,-ui-  i/,i  ,1,-u.x  Afon./fs. 

'  l.'/o,  .•.,;.)/,,•  ,/,-,  /ill, III.,-.  I  IKK);  Allix,  /'/v;///  A/,'mfn/<ii>e  ,/e  S,ii-ii,,- ,/,s 
J  111,111,, ^,  lyu;  ;    (,a»tun-(ii. .-,  / '//«/.V  j///- /^ />,- r/;;*,  iy07  ;    Ingenlileek,  /w/,V,f 


The  Income   Tax  in  France 


321 


Senator  Gauthier.'  Some  of  these  writers,  like  Gaston-Gros, 
did  indeed  not  approve  of  the  details  of  CaiUanx's  bill,  but 
they  all  approached  the  problem  from  a  new  and  progressive 
point  of  view,  and  contributed  in  no  small  measure  to  the  pas- 
sage of  the  bill. 

§  10.    The    Provisions   of  the   Income- Tax   Bill  as   adopted 

The  chief  provisions  of  the  bill  as  it  was  passed  by  the 
Chamber  of  Deputies  are  as  follows  :  -  — 

The  revenues  or  incomes  are  divided  into  seven  schedules, 
namely,  incomes  iu  .n  houses,  from  land,  from  movable  capi- 
tal, from  business  profits,  from  agricultural  profits,  from  wages 
and  salaries,  and  finally  from  professional  earnings  and  all 
other  sources  not  otherwise  charged.^  The  rates  are  fixed  at 
four  per  cent  in  the  first  three  schedules,  three  and  one  half 
per  cent  in  the  fourth  schedule,  and  three  per  cent  in  the  re- 
maining schedules. 

Dirtcts It  Indirect!  !u-  h  Rirenu,  190S.  Cf.  also  Michel  //«/ V,.-  s:ir  le$  K.:  enm 
1907;  Cannn,  L'Impot  sur  le  Knenn,  son  P,iss.;  svs  AMfs  <r.l/'/'li<.!/i,;,,  sts  F.ffels 
sur  la  Ktnteetles  V.Ueurs  i.trang>rts,  1906;  Kaurc,  le  nouie.iu  rroj f I ,/'/», fot 
sur  le  Kr.enu,  Kjoy;  Vsheti,  V  Im/^it  sur  hiKe:cnu>  Commera.iux  ft  InJustnets, 
1907;  IVlletan,  i: Impot  stir  le  Revenu,  1907  ;  /.'/w/.V  -/.'■  le  Rr.,'nu:  oh  en 
sommes-noHS?  1908;  Aimond,  la  K: forme  lis.aU  el  U  t'rotd  Cnllaux,  190S; 
and  for  the  earlier  period  Vigne,  I.'hnpbt  C„ n:>al  <».•  le  K.-.nu.  h'.,,fport  pre- 
sent;  au  Conseil  Communal  de  Gand,  1903;  iJiulos,  /:/mp-:tsur  le  Kezeiiu,  1904. 

1  La  K; forme  liseale  par  I'/mpCt  sur  le  K'eiemi.     I'ar  A.  K.  (.autluer,  I'aris, 

190S.  , 

2  The  bill  as  passed  will  be  found  in  <;erau  1-lUi^tct.  op.  ■/.'.  v\>.  204-254.  It  is 
repiintcd  witli  tlie  date  of  adoption  of  each  section,  and  with  the  names  ..f  the 
Iiarti.ipants  in  the  discussion,  in  the  bulky  volume  cntitle.l  I>i,p<t  ..v/-  le  Kfveau 
et  Impot  Compllment.iire  sur  n.iisemiU  an  Revnu.  1  exle  ,o:rpl.t  Ju  rr.'j.-l 
de  I.oi,  rot:  par  la  Chambre  des  Phputs  le  <)  Mar.-,  I>j0./.  .W-ti.e  lli^torujue 
dn  rro'jet  de  loi  et  Tahle  par  .lrti,/e  des  D^t'ats  do  la  Chamhye.  I'aris,  1910. 
It  IS  also  found  in  L'ImpAt  sur  l.e  Rnenu  referred  to  ab  .ve  on  p.  314-  ''he 
bill  is  entitled  Law  emhcdvuif;  the  Suppression  of  the  Dno.t  Taxe<  and  estah- 
I,  <l:i,!i;  a  General  Tax  on  !n,on,,  <  and  a  ( -omp'ementary  Tax  on  t'le  7o!io!e  im  ome. 
"l-i'portant  Suppression  des  Contributions  Dnvctes  ct  etabbssant  un  l.n] 
i;,:.,r»l  sur  les  Revenu.  et  un  Impot  fomplementaire  sur  I'Knsenible  du 
Kevenu."  "  Art.  3. 


i 


322 


The  Income   Tax 


\\ 


If 

«.  \ 
1 ' 


m 


% 


The  house-tax  schedule  is  virtually  a  continuation  of  the 
existing  house  tax  according  to  which,  by  the  law  of  igoo, 
the  assessable  income  is  fixed  at  the  net  revenue  i.e.  the  rental 
value,  less  twenty-five  per  cent  in  the  case  of  dwellings,  and 
forty  per  cent  in  that  of  factories.^  In  the  land-tax  schedule 
the  assessable  income  is  the  rental  value  of  the  land,  less  a  de- 
duction of  one-fifth.  Fresh  valuations  are  to  be  made  every 
ten  years.^  In  this  second  schedule  abatements  are  made  for 
smaller  incomes.  Where  the  total  income  does  not  exceed 
1250  francs,  625  francs  are  completely  exempt;  where  the 
income  is  between  1250  and  scxx)  francs  there  is  an  abatement 
of  three-fourths  on  the  first  625  francs,  an  abatement  of  one- 
half  of  the  income  between  626  and  1000  francs,  and  an 
abatement  of  one-fourth  on  incomes  from  looi  to  1250 
francs. 

The  third  schedule  comprises  the  revenue  from  personal 
property  {capitaiix  mohilicrs)  including  government  securities, 
with  some  exceptions  of  a  public  nature.^  This  tax  is  assessed, 
as  far  as  possible,  on  the  corporations  and  associations  that 
pay  the  interest  or  dividends.  In  the  case  of  mortgages  and 
the  like,  the  tax  is  levied  by  means  of  a  stamp.  In  the  case  of 
all  securities,  foreign  or  otherwise,  the  interest  or  dividends  of 
which  are  paid  through  the  medium  of  bankers  or  other 
agentb,  the  tax  is  assessed  upon  these  agents,  who  must  keep 
two  lists  or  registers  of  the  transactions  to  be  preserved  for 
at  least  two  years,  and  always  open  to  the  inspection  of  the 
government  officials.'' 

The  fourth  schedule  deals  with  business  profits,  or  so-called 
profits  of  industrial  and  commercial  enterprises.  The  tax  is 
here  assessed  on  the  average  of  three  years'  income,  and  the 
taxpayers  are  invited  to  make  a  declaration  of  their  revenue. 
This  declaration  is  compulsory,  however,  only  in  the  case  of 
incomes  over  5000  francs.  The  declaration  is  presented  to 
the  comptroller  cf  taxes  (contrdliiir).  In  case  he  is  dis- 
satisfied, he  may  ask  the  taxpayer  to  modify  the  declaration 
within  twenty  days.     If  this  is  not  done,  he  may  proceed  to 

^  Art.  7.  2  Arts.  8-10.  «  Arts.  16-17.  *  Arts.  20-26. 


The  Income   Tax  in  France 


32"? 


make  an  official  assessment,  which  is  subject  to  an  appeal  to 
the  administrative  courts.  In  this  appeal  the  comptroller  may 
defend  his  assessment  by  any  information  at  his  disposal,  and 
the  taxpayer  may  in  turn  presen*^  what  documents  he  chooses. 
In  no  case,  however,  can  the  taxpayer  be  required  to  show  his 
books.  In  case  of  false  declaration,  the  penalty  is  double  the 
tax.*  In  this  fourth  schedule,  certain  deductions  or  abate- 
ments are  made.  In  every  case  incomes  of  less  than  1250 
francs  are  exempt.  In  incomes  under  20,000  francs  the  abate- 
ments are  as  follows:  so  much  of  the  income  as  is  under  1500 
francs  enjoys  an  abatement  of  six-sevenths;  in  the  fraction  of 
income  from  1500  to  2500  francs  two-thirds  are  deducted;  in 
the  fraction  of  income  from  2500  to  5000  francs,  one-fourth 
is  deducted.     The  residue  is  taxed  in  full." 

The  fifth  schedule  comprises  agricultural  profits,  that  is, 
the  income  from  the  actual  operations  of  agriculture,  rather 
than  from  the  ownership  of  land.  The  income  is  here 
deemed  to  be  equal  to  one-half  of  the  actual  rental  value  of 
the  property  for  the  fraction  of  the  rental  value  under  500 
francs  and  two-thirds  of  this  value  for  the  fraction  over  5000 
francs.  Where  the  rental  value  does  not  exceed  12,000  francs, 
1250  francs  are  e.xempt  in  every  case,  while  abatements  are 
made  for  two-thirds  between  125 1  and  2000  francs,  and  for 
one-third  between  2001  and  3000  francs.  In  the  case  of 
private  parks  and  pleasure  grounds,  the  income  is  deemed 
equal  to  the  total  rental  value,  without  any  exemptions  or 
deductions.^ 

The  sixth  schedule  includes  wages,  salaries,  and  pensions. 
Here  the  tax  is  advanced  by  the  individuals,  associations,  or 
governments,  which  pay  the  respective  incomes.  Every  busi- 
ness man  or  company  is  required  to  hand  in  a  list  of  employees 
with  special  details.  In  the  case  of  salaries  under  5000  francs 
two-thirds  of  the  income  is  e.xempt,  and  abatements  are  made 
calculatetl  partly  according  to  the  size  of  the  income,  ami 
partly  according  to  the  numlior  of  inhabitants.^ 

The   seventh   and   final  schecluie  concerns  itself  with  the 

•  .VI I.  jo.  -  .\iU.  32-.;4.  .\.:-  J7.  j''-  *  Ail-.  ,;..-4... 


WM 


324 


The  Income   Tax 


incomes  from  the  liberal  professions.  Here  also  abatements 
and  deductions  are  made,  calculated  on  the  same  principle  as 
in  the  preceding  schedule.  Every  ta.xpayer  is  required  to 
file  a  declaration  of  his  income  from  this  source.  It  will 
be  observed  that  this  is  the  (mly  schedule  to  which  compul- 
sory declaration  applies;  and  even  here  provision  is  made  that 
no  professional  secrets  shall  be  divulged.* 

The  scheduled  income  tax,  in  which  the  principle  of  stop- 
page at  source  is  observed  as  far  as  nossible,  is  supplemented 
by  what  is  called  the  complementar .  ta.\  on  the  entire  income. 
This  is  imposed  only  upon  individuals,  and  not,  as  the  preced- 
ing part  of  the  tax,  upon  corporations  as  well.  The  tax  is 
assessed  upon  the  head  of  the  family,  who  is  responsible  for  his 
own  income  as  well  as  that  of  his  wife  and  children,  except 
when  the  wife  lives  apart,  and  when  the  children  have  an  in- 
dependent income.  It  is  levied  only  on  individuals  whose 
income  exceeds  5000  francs,  and  applies  to  all  individuals  who 
have  their  domicile  in  France.  In  the  case  of  those  who 
reside  in  F"rancc,  without  having  their  domicile  there,  the  in- 
come is  deemed  to  be  seven  times  the  amount  of  their  house 
rent.2  The  rate  of  the  complementary  tax  is  progressive,  and 
is  gradu-^ted  as  follows:  The  first  5000  francs  income  are 
deducted;  the  next  5000  francs  are  counted  at  one-fifth  of 
their  real  amount ;  the  next  5000  francs  at  two-fifths;  the  next 
5000  francs  at  three-fifths ;  the  next  5000  francs  at  four-fifths. 
It  is  only  after  25,000  francs  have  been  reached  that  the  full 
rate  of  five  per  cent  is  inijiosed.  In  other  words,  each  succes- 
sive fraction  of  5000  francs  pays  one  per  cent  additional  tax 
until  the  full  rate  of  five  per  cent  is  reached  at  25,000  francs.^ 

As  to  the  administrative  provisions  of  the  supplementary 
tax,  the  comptroller  of  direct  taxes  makes  up  a  list  of  all  those 
subject  to  taxation.  Each  of  these  must  file  a  declaration 
which,  however,  need  contain  only  the  name  of  the  taxpayer, 
his  residence,  the  abatements  which  he  claims,  and  the  amount 
of  income  from  foreign  property  or  business.  It  is  only  in 
the  case  of  the  revenue  from  personal  property  that  he  is 

'  Arti.  47-51-  ■■'  Arts.  62-65.  '  ^^-  ^- 


r^^i^^^^msL 


The  Income  Tax  in  France 


325 


compelled  to  hand  in  the  amount  of  his  income.  These  dec- 
larations  are  submitted  to  a  cantonal  commission  composed 
of  the  comptroller  of  taxes,  the  receiver  of  the  stamp  taxes 
{recevcur  d'cnngistremcnt),  and  a  collector  (/><;r <•/»/( //a-),  all  of 
them  appointed  by  the  prefect.  This  commission  may  ask  the 
taxpayer  to  explain  the  situation,  and  if  he  does  not  do  so  the 
commission  may  assess  the  tax.  He  can  appeal  from  the 
commission,  but  only  on  bearing  the  expense  of  the  appeal, 
and  submitting  documentary  proof  of  his  contention.  In  case 
of  false  declaration  the  taxpayer  or  his  heirs  suffer  a  penalty 
equal  to  one-half  of  the  income  that  has  been  concealed,  and 
furthermore,  every  one  who  fails  to  make  his  declaration, 
or  who  makes  an  inadequate  declaration,  is  penalized  in  a  sum 
equal  to  triple  the  amount  of  tax.*  Finally,  it  may  be  men- 
tioned that  in  the  case  of  all  incomes  under  12,000  francs,  a 
tax  to  the  amount  of  eight  francs  is  deducted  in  favor  of 
every  member  of  the  family,  young  or  old,  that  is  supported 
by  the  taxpayer.* 

§11.    Conclusion 

The  French  scheme,  it  will  be  observed,  is  an  ingenious 
combination  of  the  English  and  the  Prussian  systems.  It 
is  based  primarily  on  the  English  system  of  schedules,  but 
it  carries  out,  in  far  greater  detail  than  the  t;nglish  system, 
the  principle  of  differentiation,  and  it  extends  the  exemption 
and  abatements  to  a  considerably  lower  amount  of  income. 
It  adopts  from  the  Prussian  system  the  idea  of  the  taxation  of 
the  entire  income,  but  applies  it  only  to  the  higher  incomes, 
through  a  complementary  tax  which  is  akin  to  the  present 
English  super-tax,  although  the  rate  of  progression  is  some- 
what higher.  It  differs  from  the  Prussian  system  in  the 
great  solicitude  that  is  shown  to  avoid  inquisitorial  procedure. 
Direct  declarations  of  income  are,  it  will  be  remembered, 
required  of  individuals  only  in  the  case  of  professional 
incomes  under  the  .scheduled  stoppage-at-source  part  of  the 
tax,  and  in  the  case  of  incomes  from  personal  property  in 
'  Arts.  07-75.  "  •'^'■'-  ^4- 


V 


^s^mi^Kmm 


'''■Jh'^' 


326 


The  Income  Tax 


the  case  of  the  complementary  tax.  The  system  is  anxiously 
calculated  to  afford  the  maximum  of  revenue  with  the  mini- 
mum of  annoyance. 

During  the  discussion  of  the  income-tax  project,  much 
diflficulty  was  experienced  from  the  fact  that  M.  Caillaux 
had  not  yet  definitely  made  up  his  mind  as  to  what  disposi- 
tion to  make  of  the  whole  subject  of  local  finance.  He  was 
able  to  overcome  the  difficulties  only  by  promising  to  dispose 
of  this  subject  in  a  separate  bill,  to  be  submitted  later,  and 
which  would  be  so  arranged  as  not  to  inteifere  in  any  way 
with  the  principle  of  the  income  tax  itself.  Accordingly  on 
March  3,  1909,  M.  Caillaux  presented  his  scheme  for  the 
reform  of  local  taxation. '  As  this  bill  has  not  yet  been  dis- 
cussed, however,  it  may  suffice  to  state  in  general  that  it 
replaces  all  the  existing  centimes  ixdditionneh  with  a  supple- 
ment to  the  state  income  tax.  But  several  modifications  are 
made  in  this  local  supplement.  In  the  first  place,  there  is  no 
local  tax  on  the  income  from  movable  capital.  In  the  second 
place,  since  the  progressive  rate  was  introduced  only  as  a 
makeweight  against  the  indirect  taxes,  and  inasmuch  as  in- 
direct taxes  play  a  slight  role  in  local  finance,  the  local  income 
tax  is  made  proportional.  In  the  third  place,  the  inipot  global 
is  permitted  on  incomes  below  5000  francs,  but  is  then  to  be 
calculated  for  local  purposes  in  some  relation  to  house  rentals. 
Certain  additional  exemptions  and  abatements  are  also  per- 
mitted. 

Shortly  after  the  adoption  of  the  income-tax  bill  by  the 
chamber  of  deputies,  it  was  submitted,  on  March  16,  1909, 
to  the  Senate.  M.  Caillaux  prefaced  it  with  a  short  exposi' 
des  motifs,"^  in  which  he  expounds  the  reasons  which  had 

•  Projet  lie  l.oi  portitnt  Suppression  ties  CentimfS  Pepnrtemenlaux  el  Com- 
muiiaiix.  Chani'>re  des  Deputes,  Sessum  de  1909,  no.  2351.  Cf.  as  to  this  the 
Kri'tie  Je  Science  et  de  Legislation  Financirres,  1909,  pp.  342,  et  icy. 

»  Expose  des  Motifs.  I'rojei  ./e  l.oi  adoptc  par  le  Clutmhe  des  Pcputcs,  por- 
tant  Suppression  des  Contri'iutions  Directes  et  f.lablisseinent  d'lin  Imp&t  Ghtir,il 
sur  les  Revenus  et  d'lin  fmpSi  Complimentaire  siir  V FnsemMe  dti  Krt'inu.  Pre- 
sent;- au  nom  de  M.  Armand  Fallieres.  President  de  la  Kepuhliqite  Franfaise. 
Par  M.  J.  Caillaux,  Ministre  des  Finances.    Senat,  Annee  1909,  no.  66,  54  pp. 


The  Income   Tax  in  France 


327 


actuatd  the  lower  house.  "Taking  account  of  the  distri- 
bution of  wealth  in  France,  of  the  existin-;  state  of  affairs, 
and  of  the  customs  and  traditions  of  the  French  taxpayers, 
the  Chamber  and  the  Government  have  succeeded  in  avoid- 
ing everything  that  might  compromise  the  success  of  the 
work  that  had  been  undertaken.  We  have,  however,  not 
been  willing  to  content  ourselves  with  a  mere  semblance  of 
reform ;  and  inasmuch  as  the  predominance  of  indirect  taxes 
in  our  actual  system  involves  a  decided  disadvantage  to  the 
small  taxpayer,  and  an  upside-down  progression  of  individual 
payments,  we  have  endeavored  to  reestablish,  as  far  as 
possible,  the  principle  of  proportioning  every  one's  sacrifices 
to  his  income,  and  thus  to  restore  an  equilibrium  that  has 
for  a  long  time  been  disturbed." »  A  few  months  later,  with 
the  overthrow  of  the  Ministry  on  an  entirely  different  matter, 
Caillaux  resigned  in  June,  1909.  He  was  replaced  by  Cochcry, 
who  himself  was  succeeded  in  November,  1910,  by  Krantz. 

The  Senate,  however,  is  proverbially  conservative,  and  the 
commission  to  which  the  bill  was  referred  brought  in  an  un- 
favorable report  early  in  19 10.  In  the  meantime,  the  various 
interests  in  the  country  that  were  opposed  to  the  enactment  of 
the  law,  rallied  to  the  defence,  and  an  active  campaign  was 
augurated.  Two  important  associations  were  formed.  One 
entitled  "The  League  against  the  Income  Tax  and  Fiscal 
Inquisition"  {Liguc  contrc  I'lmpot  snr  le  rcvcnn  ct  V Inquisi- 
tion fiscalc)  is  presided  over  by  M.  Paul  Fournier,  a  promi- 
nent Paris  business  man.  The  other  association  is  called 
the  "Association  for  the  Defence  of  the  Middle  Classes" 
(Association  dc  Defence  des  Classes  Moyennes),  of  which  the 
president  is  M.  Maurice  Colrat.  Both  of  these  associations 
have  been  pursuing  an  active  campaign,  holding  meetings 
and  publishing  large  volumes  and  small  pamphlets  designed 
to  influence  public  opinion.^ 


i» 


1  Expoic  lies  Motifs,  ]>.  2. 

«  Cf.  esp.  IVotfihitiriis  ,/c  /,-(i('  SyitJua/s  centre  /-  Proift  Cnillaiuc.  Paris, 
1908;  Qufstionnaiy^  sur  rimpouluoi  ./<•<  Valntn  MohUures.  J'aris,  1910. 
The  middle-class-clc-lence  associalum  also  has  [.vi;  ii^iiuii  miu.c   Vf>r>  a  quarterly 


328 


The  Income   Tax 


What  the  result  will  be  is  uncertain.  That  the  large  legis- 
lative majority  in  favor  of  the  income-tax  scheme  will  be  re- 
versed is  unlikely  ;  but  ou  the  other  hand,  the  conservative 
Senate  gives  way  to  the  radical  movement  only  after  the  most 
unmistakable  expressions  of  popular  opinion.  Thus  the 
Senate  finally  deferred  to  the  judgment  of  the  lower  house 
on  the  question  of  the  purchase  of  the  Western  Railway,  and  it 
came  to  a  similar  conclusion,  despite  its  own  original  opinion, 
on  the  subject  of  the  workman's  insurance  bill.  It  is  entirely 
probable,  therefore,  that  unless  these  new  defence  associations 
should  succeed  in  changing  the  present  temper  of  the  French 
people,  the  Senate  will  sooner  or  later  adopt  the  Caillaux  proj- 
ect. That  this  will  take  place  within  the  next  two  or  three 
years  is  not  to  be  expected,  but  that  it  will  come  before  long 
is  scarcely  open  to  question. 

bulletin  eiUillcil  /./.<  fi.luM  Fhciles  tt  Sodnlts.  A  recent  .loctor'*  <li»iiertation 
inspired  liy  the  same  i.leas  is  a  rath^.-r  elat>orate  study  uf  U.  Mi.reau,  /.'//«/<)/ 
GMhil  tl  frogrnsif  sur  le  Hrjenu.     Poitiers,  191a 


CHAPTER   III 


The  Income  Tax  in  Other  Countries 

The  income  tax  is  found  in  many  other  countries. '  But 
with  a  few  exceptions  it  is  a  fact  either  that  these  countries 
are  themselves  small  and  unimportant,  or  on  the  other  hand 
that  the  income  tax  plays  a  most  insignificant  r6le  in  the 
fiscal  system.  As  this  work  is  an  attempt  not  to  compile 
statistics  or  legislative  provisions,  but  to  explain  the  im- 
portant developments,  we  shall  pass  over  all  the  other 
foreign  countries  with  exception  of  Austria,  Italy,  and  Switzer- 
land. These  we  shall  now  proceed  to  examine,  for  each  of 
tht  1  has  a  decided  lesson  to  teach  us. 

§  I.    Austria 

In  the  eighteenth  century  Austria,  as  a  part  of  the  German 
]':mpire,  had  very  much  the  same  system  of  taxes  as  the 
other  German  states,  namely  a  system  of  property  and 
produce  taxes  combined  with  an  excise.'^     Austria  differed, 

1  The  income  tax  is  fuun.l  for  either  state  or  local  purposes,  or  both,  in  almost 
all  the  Kuropean  countries,  like  Austria,  Itily,  Spain,  UelKium,  Sweden,  Norway, 
Denmark,  Swit/.erlan.l,  Mollana,  (.Ireece,  Luxemburg.  an,l  linlan.l  ;  in  .\u,tralia 
an.l  New  Zealan.l  ;  in  japan  an<l  Inlia  ;  and  in  the  lape  of  Coo.l  Hope  an.l 
Hawaii.  The  statistics  as  t..  these  will  be  foun.l  in  Kcnnan,  /;;,.-«/.  /„x.,tu>,, 
1910  \  large  amount  of  detail  on  these  countries  will  also  be  found  in  Sclignian, 
Proj^fssnr  Lixalion.  2.1  e.l.,  !<JoS.  part  l,  and  the  literature  there  ment.ore.i. 
An  appreciation  of  the  Australian  system  will  be  found  in  the  evidence  ol  Mr 
Coghlan  before  the  Sdut  Committfe  on  Ihf  Income  Tax,  1906,  pp.  SH-105. 

•1  For  an  account  of  the  earlier  Austrian  experiments  with  the  income  tax,  see 
M  Heekel,  I.ehrbuch  Jer  Hnanzwissfusihaft.  vol.  1,  1907,  pp.  371  tt  st,/.  lor 
Jhe  more  recent  dcvelopmenls,  see  the  articles  by  M.  I-esigang,  "Die  bisherigen 
Versuche^ur  Reform  <ler  Direkten  Steuern  in  Ocsterreich."  /-in.inz  Archiv,  vol.  vi 
( 1889).  pp.  5  vS  •/  sff. :  Sieghart. "  1  )ie  Steuerreform  in  ( lesterreich,-  iM.,  vol.  xiv 
(1897),  pp.  le/  sf,/. .-  1-reiherr  von  Myrbach,  '•  Uie  Reform  der  I  )irekt,  n  Steuern  n. 


Oesterreich,''   >ciimoilcr's  /./'i /('«.«,  *"i.  *xii 


:iSqK;, 


\.:r,   1-iirt' 


330 


The  Income  Tax 


M 


however,  from  some  of  her  sister  states  in  that  she  made  ex- 
periments with  a  personal  tax  during  the  eighteenth  century. 
These  took  the  form  of  class  taxes  under  the  name  of  Per- 
sonal-, Ratig;  und  Standcsshinrn.  We  find  even  sporadic 
attempts  at  an  income  tax,  as,  for  instance,  in  1743,  and  again 
in  the  war  taxes  of  1778.  1789,  and  1790.  All  these  taxes 
were,  however,  entirely  of  an  ephemeral  nature,  and  we  hear 
nothing  more  of  them  during  the  first  half  of  the  nineteenth 

ccn..iry. 

The  revolution  of  1848,  however,  brought  about  the  same 
movement  in  Austria  as  in  the  other  German  states,  with  the 
exception  that  in  Austria  it  was  financial  necessity  rather  than 
democratic  tendency  which  led  to  the  introduction  of  the  in- 
come tax.  At  that  time  the  direct  taxes  consisted  of  the  land 
tax,  the  buildings  tax,  and  the  earnings  tax  {Enverbstcuer),  and 
the  idea  was  to  add  to  these  taxes  on  product  another  tax 
of  a  similar  nature  which  should  reach  the  earnings  of  capital 
as  well  as  of  wages.  Accordingly,  in  1849,  the  so-called  in- 
come tax  was  introduced  as  a  temporary  measure.  The  law 
was  confessedly  defective,  but  was  excused  on  the  ground  both 
of  its  pressing  urgency  and  of  its  temporary  character ;  but 
instead  of  being  abolished  at  the  end  of  the  term,  as  had 
been  anticipated,  it  was  continu  1  from  year  to  year  with  oc- 
casional amendments.  Moreover,  the  wars  of  1859  and  1866 
necessitated  not  only  a  continuance  of  the  law,  but  an  increase 
of  the  rates.  The  original  act  of  1849,  with  its  amendments 
during  the  fifties  and  the  sixties,  provided  for  three  schedules. 
The  first  included  incomes  from  business  already  subject  to 

UitEinkommensteuer  in  Ofsterrtiih  um' Ihre  Krform.  Vienia,  1892.  For  the 
latest  refiirms  see  F.  vnn  Wiesor,  Dit  Ergehnisse  und  Ausiichten  der  I'frsonal- 
Eiiih'mnifnstfuer  in  Oeslfrrruh.  Leipzig,  190I:  Freiherr  von  Myrbach,  Crund- 
riss  des  hnuin:r,\hti.  Vicnn.i.  \^yo(v,  O.  Mann  and  il.  Jedlicka,  An  Oesttrreich- 
ische  PfrsonahlfUfigeset-.  n.'.h  drm  derzeiU^en  St.tnde  dtr  Praxis.  Vienna,  1904; 
Meyer,  I'cnsch,  et  al..  Die  dirikltn  Personahteutrn.  Vienna,  1907  [with  a 
full  bibliograiihy J ;  K.  liumlsmann,  Ditostfrreuhuche  f'frsonal-Einkommensleurr. 
Innsbruck,  1909;  V.  Marie,  /:imf<it  sur  U  h'erenu  en  Aitlrtche.  Paris,  1907. 
An  account  of  the  Austrian  s,  tern  will  also  be  fouml  in  the  Fnglish  Rtiit  Book 
quoteil  on  p.  i.W  ''A  a''"'  •<•  Siefihart,  "  Reform  of  Direct  Taxation  in  Austria," 
E<onomt<  Journal,  vol.  viii  (1S9S),  pp.  17J  el  siQ. 


The  Income  Tax  in  Other  Coimtries         331 

the  earnings  tax.     It  also  comprised  mining  profits  and  agri- 
cultural profits.     Originally  levied  at  the  rate  of  five  per  cent, 
it  became,  in  the  course  of  time,  a  progressive  ta.x.     In  the 
case  of  certain  associations  and  corporations  falling  within 
the  schedule,  a  rather  extreme  progressive  rate  was  adopted, 
ranging  from  two  and  one-half  to  almost  ten  per  cent.'     The 
second  schedule  comprised  incomes  from  personal  exertions, 
including  professional  incomes  not  subject  to  the  earnings  tax. 
This  was  also  arranged  according  to  a  progressive  scale.     The 
third  schedule  included  incomes  from  capital  and  what  we 
should  call  intangible  personalty.     The  rate  was  not  progres- 
sive, but  different  kinds  of  income  were  taxed  at  different  rates. 
Corporations  were  taxable  in  the  first  schedule,  and  had  the 
right  to  deduct  the  tax  from  the  dividends  and  interest.     But 
in  practice  they  made  no  use  of  this  right. 

The  income  tax  of  1849.  "  >,  its  amendments,  suffered 
from  several  defects.  In  the  .  ..  t  place,  the  construction  of 
the  law  was  clumsy  in  that  no  real  attempt  was  made  to  ad- 
just the  income  tax  to  the  already  existing  taxes  on  product, 
thus  leading  to  much  double  taxation.  Secondly,  the  admin- 
istrative features  were  not  worked  out  in  harmony  with  the 
customs  of  the  country,  and  in  the  third  place,  the  rate  of  the 
tax  was  entirely  too  high.  Not  only  had  the  normal  rate 
become  ten  per  cent,  but  additions  for  local  purposes  were 
permitted,  ranging  in  some  c  ises  up  to  double  the  state  ta.x. 
A  tax  of  twenty  per  cent  on  income  in  time  of  peace  was,  of 
course,  entirely  unendurable,  and  just  as  is  the  case  with  the 
local  property  tax  in  the  United  States  which,  strictly  en- 
forced, would  take  from  thirty  to  fifty  per  cent  of  a  man's 
income,  the  ordinary  taxpayer  considered  it  perfectly  justifi- 
able to  evade  the  tax  as  far  as  possible.  The  struggle  which 
ensued  between  the  administration  and  the  government  re- 
sulted in  Austria,  as  it  has  resulted  very  largely  in  the  United 
States,  in  a  system  of  exceedingly  lax  admini.stration,  whereby 

IThe  exact  gra^luation  of  this  an.l  of  thr  ..th.-r  sche.lules  in  the  Austri.in 
income  tax  will  be  found  in  Scl.gman,  r>;>,^r,.u-c  Taxation,  2(1  e.l..  l.pS,  pp.  5«. 
tt  u./. 


3-^  ' 
J- 


The  Income  Tax 


the  officials  made  a  practice  of  permitting  individuals  to 
return  only  a  small  part  of  their  income.  The  vice  of  such  a 
system,  there  as  here,  is  of  course  the  inequality  and  the  re- 
sulting injustice  of  the  arrangement  in  particular  cases. 

The  dissatisfaction  with  thest  immense  frauds  and  evasions 
on  the  one  hand,  and  with  the  lax  administration  of  the  law 
on  the  other,  prompted  the  Austrian  government,  during  the 
seventies,  to  attempt  a  general  reform  of  the  whole  system. 
So  deep-rooted,  however,  had  the  old  customs  become  that 
such  a  general  reform  proved  to  be  entirely  impracticable. 
It  was  only  toward  the  end  of  the  eighties,  when  the  govern- 
ment finally  decided  to  content  itself  with  attempts  at  partial 
reform,  that  any  progress  at  all  was  made,  and  even  here  it 
took  several  years  of  hard  work  until  various  ministers  of 
finance,  like  von  Plener,  Bilinski,  and  the  well-known  econo- 
mist Boehm-Bawerk,  took  part  befo'-.  the  law  of  1896  was 
enacted. 

The  new  act  is  entitled  "The  Inw  affecting  the  direct  per- 
sonal taxes,"  '  and  as  the  title  indicates,  no  attempt  was  made 
to  deal  with  the  existing  taxes  on  product,  and  especially  the 
taxes  on  land  and  buildings.  The  law  is  divided  into  five 
parts.  In  the  first  place,  it  deals  with  the  so-called  general 
earnings  tax  {Al/gciiicine  Envcrhttutr),  which  is  modelled 
largely  on  the  Prussian  tax.  Secondly,  it  includes  a  so-called 
"  corporation  "  tax,  applying  to  all  associations,  at  the  rate  of 
ten  per  cent.  The  third  element  is  the  so-called  RctitiHstiuir, 
which  takes  the  place  of  the  old  third  schedule  of  the  original 
tax.  The  rates,  however,  are  from  one  and  one  and  one-half 
to  ten  per  cent.  The  remaining  two  schedules  of  the  original 
income  tax  were  consolidated  into  what  is  known  as  a  general 
income  and  salary  tax  ( I^i  rsoiKiliinkomiiun-  iind  Btsoldungs- 
steiiei).  These  are  arranged  according  to  a  graduated  scale, 
rising  to  five  per  cent  on  general  incomes,  and  reaching  six 
per  cent  on  salaries  over  1 5.000  florins  [or,  to  use  the  recently 
introduced  money  unit,  30,000  crowns].'*' 

1  Da!  Ce!ftz  uhtr  die  Ph  kirn  Prrsoiinl  SUufrii,  v.  i^  Oct.  lS()6. 

-  iiir  (ifi.uK,  '^rf  .•^ciigiiiun,  tp.  iti.f  i».  00. 


The  Income  Tax  in  Other  Countries         m 


The  income  tax  is  assessed  on  all  resident  Austrians,  so  far 
as  their  income  is  concerned.  Non-resident  Austrians  are 
taxable  on  their  income  derived  in  Austria.  Foreigners,  in- 
cluding Hungarians,  who  have  resided  for  more  than  a  year 
in  Austria,  are  taxable  on  their  income  derived  in  Austria. 
The  income  from  foreign  sources  is  exempt  if  it  is  already 
subject  to  a  lump-sum  income  tax.  The  higher  courts,  how- 
ever, have  decided  that  this  exemption  does  not  apply  in  the 
case  of  the  English,  the  Italian,  or  the  Hungarian  income  tax. 
The  law  authorizes  the  government  to  conclude  treaties  with 
foreign  countries,  on  the  principle  of  reciprocity,  and  by  an 
act  of  1899  such  a  reciprocal  arrangement  was  made  with 
Germany,  whereby  the  income  from  real  estate  is  to  be  taxed 
only  where  it  is  situated,  and  the  income  from  personal  prop- 
erty only  in  the  land  of  actual  domicile. 

The  exemptions  and  abatements  are  similar  to  those  in 
Germany.  A  minimum  of  1200  crowns  is  entirely  exempt. 
In  the  case  of  incomes  under  4000  crowns  an  abatement  of 
one-twentieth  of  the  income  is  permitted  for  each  dependent 
beyond  two;  in  the  case  of  incomes  under  io,ooo  crowns 
an  abatement  of  not  to  exceed  three  classes  is  permitted  for 
any  circumstances  which  diminish  the  ability  to  pay,  such  as 
illness,  assistance  of  parents,  education  of  children,  or  military 
service.  Finally,  peasant  proprietors  with  an  income  up  to 
500  crowns  (which  may  be  increased  by  the  Minister  of 
Finance  to  600  crowns)  are  freed  from  taxation. 

Taxable  income  is  defined  as  the  sum  of  all  revenues  in 
money  or  in  money's  worth  to  the  individual,  including  the 
rental  value  of  his  house  and  the  value  of  his  produce  con- 
sumed for  family  purposes,  after  deducting  interest  on  in- 
debtedness, as  well  as  all  expenses  incurred  in  securing  the 
revenues.  Extraordinary  receipts,  such  as  those  from  gifts, 
inheritances,  and  the  like  are  not  considered  taxable  income. 
Profits  from  sales  are  included  only  if  they  are  the  result  ot" 
regular  business  or  of  speculative  transactions.  Life  insur- 
ance premiums  are  deducted  up  to  :roo  crowns  a  year  for  a 
single  life,  and  400  crowns  fur  the  family.     The  items  that 


334 


Tlie  Income  Tax 


r  ■  1 


li 


may  be  deducted  for  expenses  are  carefully  enumerated. 
They  do  not  include  the  payment  of  debts,  the  investment  of 
capital,  or  improvements  which  exceed  the  customary  allow- 
ance for  such  purposes.  Ordinary  and  periodical  profits  are 
reckoned  for  the  preceding  year,  while  profits  of  an  uncertain 
annual  value  are  computed  at  the  average  of  three  years. 
This,  it  will  be  observed,  is  just  the  reverse  of  the  English 
practice. 

Every  recipient  of  income  of  more  than  2000  crowns  must 
make  a  declaration  of  his  income ;  those  with  incomes  be- 
tween 200  and  2000  crowns  need  do  so  only  when  the  decla- 
ration is  especially  asked  for.  The  declarations  are  made  on 
a  large  sheet,  and  one  of  the  higher  officials  advises  the  tax- 
payer "  to  consecrate  to  this  purpose  a  '.cimre  hour,  a  moment 
when  he  has  entire  tranquillity  of  mind,  for  the  matter  is  not 
so  simple,  and  is  of  considerable  importance  to  him."*  It  is, 
indeed,  not  a  simple  matter.  Taxpayers  are  asked  to  fill  out, 
in  two  separate  columns,  headed  fixed  and  uncertain  incomes, 
the  rcvrenues  from  six  possible  sources  :  land,  houses,  business, 
personal  exertion,  personal  property,  and  sources  not  other- 
wise mentioned.  The  difficulties  in  making  the  declaration 
arise  partly  from  the  definition  of  income,  and  partly  from 
the  provision  as  to  expenses.  W^hat  should  be  considered 
"  money's  worth "  is  very  uncertain.  Technically,  for  in- 
stance, the  value  of  the  official  dinners  given  by  a  higher  to 
a  lower  official  is  reciuired  to  be  included  in  income.  Much 
difficulty  again  arises  from  the  fact  that  a  careful  account 
must  be  kept  by  the  peasants  of  what  they  buy  and  of  what 
they  raise  for  home  consumption.  In  th  ;  case  of  deductions 
for  exper..ses,  again,  the  wages  of  the  farm  laborer  may  be 
deducted,  while  those  of  the  cook  may  not  be  deducted.^ 
Similar  complications,  which  might  be  multiplied,  show  how 

'  Wit  das  Pers,ii>nlfiiik<'iiii>iens/fUtr-Pekfiinfitis!  -.erfitssl  -vetdrn  snll.  Von 
Dr.  Ruilolph  Pcnsch.  Vimna.  li>o,S.  l-'ur  a  somcwliat  earliL-r  wnrk  un  the  same 
subject,  see  S/,iifrfii'/;ii-iiii(^  iiiti/  S(,  ii,r,iH//,!i,'f  nuf  il,m  Crbirtf  iler  JirekUn 
Pfrsniiiihffui-rii  iii  (^r-/frrfi,/i.      Vim  II.  Kamhht'n'.     Vitnna.  I0O7. 

"  />»>  Oeiterreiihiuhtn  Sleuei triigtr.    Von  I.cniiuM  Ik-rg.    Vienna,  1.S98,  p.  38. 


I; 

i 


The  Income   Tax  in  Other  Countries         335 

difficult  it  is  even  for  the  honest  taxpayer  to  make  up  his 
return.  Moreover,  in  the  declaration  he  must  stote  the  sums 
due  to  all  creditors,  and  also  the  name  and  address  of  his 
employer  if  he  is  an  employee,  or  the  name,  address,  and 
wages  of  his  employees  if  he  is  an  employer.  Finally,  two 
pages  are  left  for  further  details.  In  view  of  all  these  com- 
plexities, it  does  not  surprise  us  to  learn  that  "  when  the 
Mayor  of  Carlsbad  pointed  out  the  facts  to  a  gentleman  and 
asked  him :  '  Would  you  like  to  own  some  property  here  ? ' 
he  turned  tail  and  ran,  and  has  been  running  ever  since."  * 

After  the  declarations  are  made,  they  are  turned  over  to 
the  so-called  "  trusty  individuals  "  (  Vcrtraiicusmdmicr).  These 
trusty  individuals  existed  under  the  old  law ;  but  according 
to  the  law  of  1896  they  now  represent  the  ta.xpayers,  being 
elected  by  the  local  districts.  According  to  the  Austrian 
voting  system,  however,  they  represent  primarily  the  larger, 
rather  than  the  smaller,  taxpayers.  These  trusty  individuals 
are  supposed  to  correct  the  Hsts  in  case  of  doubt,  and  then 
to  hand  them  over  to  the  assessment  commissioners.  As  a 
matter  of  fact,  however,  the  trusty  individuals  have  become 
very  largely  a  paper  organization.  The  assessment  com- 
mission {Scliatruui^s-Commission)  is  composed  of  a  president 
named  by  the  Minister  of  Finance  and  of  members  half  of 
whom  are  elected  by  the  taxpayers  and  half  appointed  by  the 
government.  Their  powers  arc  rather  wide,  although  not  so 
wide  as  in  Italy.  In  case  of  doubt  they  may  demand  further 
explanation  from  the  taxpayer  and  may  summon  experts,  but 
they  cannot  require  the  books,  nor  enter  upon  the  business 
premises.  If  still  dissatisfied  after  the  examination  of  the  tax- 
payer, they  may  estimate  his  income  according  to  outward 
signs.  Appeals  are  permitted  to  the  Appeal  Commission 
( Bcniftiuffs-Coiiniiisston )  and  to  the  higher  courts. 

There  is  no  injunction  of  secrecy,  as  in  a  great  many  other 
countries.  When  the  law  was  passed  there  was  a  heated 
contest  between  those  who  advocated  publicity  of  returns 
and  those  who  were  in  favor  of  secrecy.     The  compromise 

'  Quotcil  in  Marct',  ()/.  cil.,  p.  36. 


336 


The  Income  Tax 


t 


I 


IW: 


which  was  adopted  provided  for  making  accessible  to  every 
taxpayer  for  two  weeks,  not  the  returns  of  income,  but  the 
registers  of  orders  of  payment,  which  contain  the  names  and 
assessment  of  taxpayers;  but  any  invidious  publication  of 
details  was  made  punishable  with  fine.  The  penalties  for 
fraud  and  evasion  are  very  severe.  Evasion  {Stciier/iintir- 
zu/mnff)  is  punishable  by  a  fine  varying  from  three  to  nine 
times  the  amount  of  tax.  Evasion  {Staurheimlichung)  — 
which  consists  in  the  omission  of  certain  of  the  returns  de- 
manded—is punishable  by  a  fine  varying  from  twice  to  six 
times  the  amount  of  income. 

Such  are  the  chief  administrative  provisions  of  the  law. 
They  seem  to  be  comprehensive  enough  and,  barring  some 
rather  difficult  complications,  quite  up  to  the  level  of  modern 
requirements.     When  we  come  to  inquire  how  the  law  works 
in  practice,  however,  the  picture  is  a  different  and   by  no 
means  a  rosy  one.     That  the  situation  is  considerably  better 
than  it  was  before  the  reform  of  1896  is  undoubted.     Nor  can 
it  be  said  that  the  tax  is  very  unpopular.     This  absence  of  dis- 
content is  due  to  several  causes.     In  the  first  place,  the  tax- 
payers themselves  participate  to  a  certain  extent  in  the  ad- 
ministration of  the  law.  partly  through  the  "trusty  individuals," 
and  partly  through  the  assessment  commissions.     Secondly, 
the  not  very  high  progressive  rates  are  counterbalanced  by 
the  preponderance  given  to  the  wealthier   classes   in  their 
official  representatives.     Thirdly,  the  income  tax  is  not  sup- 
plemented by  a  progressive  inheritance  tax  as  in  England,  or 
by  a  property  tax  as  in  (iermany.     Eourthly,  and  chiefly,  the 
income  tax  is  only  a  supplementary  tax  of   comparatively 
slight  importance.     Not  only  is  the  yield  of  the  income  tax 
insignificant,  when  compared  with  the  other  direct  taxes,  but 
the  produce  of  all  the  direct  taxes  together  is  small,  in  com- 
parison to  that  of  the  indirect  ones.     The  yield  of  the  income 
tax  indeed  increased  from  forty-four  million  crowns  in  1898  to 
fifty-nine  millions  in  1905,  and  to  seventy-eight  millions  in  1909. 
Hut  in  IQO.^  the  income  tax  yielded  only  one-si.xth  of  the  in- 
i-omc  from  direct  taxes,  and  only  one  thirty-fifth  of  the  total 


The  Income   Tax  in  Other  Connlrics         337 

government  revenue;  and  among  these  indirect  taxes  must 
be  mentioned  not  only  the  taxes  on  spirits  and  tobacco,  but 
also  those  on  sugar,  on  meat,  and  •)n  salt.  The  tax  on  salt 
alone  yielded  almost  as  much  x9  the  entire  income  tax. 

Notwithstanding  the  progressive  improvement  of  the  ad- 
ministration, the  law  is   honeycombed   with  fraud.      Those 
who  anticipated  that  Austria  would  repeat  the  unexpectedly 
good  results  of  the  enactment  of  the  Prussian  law  in   1893 
were  wofully  disappointed.     Despite  a  rather  wide  latitude 
given  to  the  officials,  and  a  procedure  which,  although  not 
comparable  to  the  Prussian,  may  nevertheless  be  considered 
inquisitorial,  the  officials  seem  to  be  unable  to  ascertain  the 
income  of  the  taxpayers  with  any  approach  to  accuracy,  and 
the  returns   are   notoriously  defective.     Writing  five   years 
after   the   enactment   of   the   law,   Professor   Wieser   called 
attention  to  the  notorious  undervaluations,  not  only  in  the 
country  districts,  but  in  general  among  the  wealthiest,  as  well 
as  among  the  poorest  classes  of  the  population.     He  sadly 
confessed  that  there  was  no  general  disposition  on  the  part 
of  the  public  to  make  even   half-way  satisfactory  returns. 
Owing  to  this  lack  of  public  sentiment  Professor  Wieser  called 
the  income  tax  a  torso,'  and  after  adverting  to  what  he  termed 
"  the  deplorable  {kldgliche)  results  of  the  new  law,"  he  main- 
tained that  "  all  merely  legislative  changes  and  any  additional 
powers  that  might  be  conferred  upon  the  administrative  au- 
thorities would  be  useless  without  a  change  in  the  inner  spirit 
of  the  law,  which  could  be  attained  only  when  the  irresistible 
force  of  public  opinion  was  gained  in  favor  of  the  law."  ^     But 
only  exceedingly  slight  progress  has  been  made  in  v.inning 
over  public  opinion  in  support  of  the  \a\\^  and  Dr.  Mv,yer, 
one  of  the  high  government  officials,  concedes  that   frauds 
and  evasions  have  become  "epidemic."      While  it  is  unde- 
niable that  the  frauds  are  slowly  diminishing,  they  still  attain 
immense  figures.     It  is  estimated  that  not  more  than  a  third 
or  a  half  of  the  actual  income  is  really  reached. 

So  unsatisfactory,  indeed,  are  the  results  of  the  efforts  to 

«  Wieser.  op.  dt.,  p.  139.  "  Op.  at,  p.  134-  •*  ^"<'^'  P-  ^- 


338 


The  Income   Tax 


! 


I 


'■H 


reach  the  real  income  that  recourse  has  been  taken,  to  a  very 
large  extent,  to  that  section  of  the  law '  which  permits  the 
officials  to  estimate  a  man's  income  according  to  outward 
signs,  and  especially  his  house  rent.  There  has  been  much 
litigation  as  to  the  exact  meaning  of  this  paragraph.'*  In 
actual  practice,  however,  a  man's  income  is  computed  at  about 
five  times  the  amount  of  his  house  rent.  Thus  what  was  de- 
signed to  be  an  accurate  income  tax  turns  out  to  be,  in  large 
measure,  nothing  but  a  very  rough  sort  of  a  house-rentals  tax. 
The  Austrian  income  tax,  therefore,  is  far  from  being  a 
success.  Insignificant  in  yield,  it  is  inadequate  in  adminis- 
trative practice.  According  to  the  letter  of  the  law,  the  tax 
is  in  many  respects  admirable  ;  but  in  the  working  out  of 
the  system  there  is  a  sad  gap  between  the  intention  of 
the  legislator  and  the  actual  results.  The  Austrian  income 
tax  is  a  striking  e.xample  of  the  impossibility  of  making  purely 
paper  reforms,  and  it  shows  us  that  no  matter  how  excellent 
the  law  or  the  administrative  provisions  may  be,  if  they  do 
not  respond  to  the  deep-seated  convictions  of  the  people,  and 
if  they  are  out  of  harmony  with  the  business,  political,  and 
economic  conditions  of  the  country,  they  cannot  possibly 
succeed.  A  successful  income  tax  depends  in  most  instances 
upon  the  readiness  of  the  people  to  support  the  administra- 
tion, and  if  this  support  is  lacking,  the  tax  is  bound  to  be  a 
failure.  Austria  has  not  yet  reached  the  stage  where  the 
public  has  come  to  the  support  of  the  goveinment,  and  con- 
sequently, despite  the  undeniable  progress  that  has  been  made 
during  the  past  fifteen  years,  the  Austrian  income  tax  must 
still  be  pronounced  a  relative  failure. 


§  2.    Italy:   The  Historical  Development 

The  Italian  income  tax  was  one  of  the  first  products  of 
united  Italy.^     In  the  separate  -^Mtes  which  united  to  form 

'  Par.  214.  -  Cf.  esp.  Mann  an^l  Jcdlicka,  op.  at.,  pp.  202  et  seq. 

'The  best  accounts  of  the  Italian  income  tax  are,   fur  the   earlier   period, 

A.  Wssolowsky,  L'Impot  iur  U  Kevenu  AMilier  en  Italie.     St.  Petersburg,  l»79: 


The  Income   Tax  in  Other  Countries         339 


the  new  kingdom  there  was  to  be  found  a  system  of  taxa- 
tion on  product,  which  differed,  however,  from  state  to  state. 
supplemented  in  a  very  few  cases  by  so-called  "personal 
taxes."  Thus,  for  instance,  we  find  in  Venice  a  business  tax 
as  well  as  a  capital  tax,  and  in  Lombardy  both  these  taxes, 
together  with  a  poll  tax ;  while  a  so-called  income  tax,  which 
was  of  a  very  partial  character,  and  which  rested  largely  on 
outward  presumptions,  had  been  introduced  in  both  of  these 
states  in  the  early  fifties.  In  Parma  we  find  a  business  tax 
and  a  so-called  personal  tax;  in  Modena,  a  poll  tax  with 
a  rather  complicated  system  of  property  taxes ;  in  Piedmont 
a  personal  and  movable  property  tax ;  in  Tuscany  a  so-called 
family  tax ;  in  the  Papal  states  a  business  tax  and  a  class  tax; 
in  the  Neapolitan  monarchy  a  tax  on  wages  and  pensions; 
and  in  Sardinia  a  rather  complicated  system  of  taxes  on 
industry  and  business.^  It  was,  however,  not  so  much  a 
desire  to  bring  order  into  this  fiscal  chaos  as  the  imperious 
need  of  securing  an  adequate  revenue  for  the  new  monarchy 
that  led  to  a  movement  for  the  introduction  of  an  income  tax. 

and  for  the  more  recent  peri...!,  l.e  Vicomte  Olivier  .le  Spoelberch.  nimpit  sur 
It  Kr.enu  en  Italie.  lirussels.  1908.  .\  French  doctor's  <li,strtati.>n  un  the 
subject  is  that  l.y  .\.  Tai^in  I.aba/or.liere  Kuillicr  Hcaufon.l,  /.'//«/.;/  iur  Us 
Rnmus  de  la  Ku/ifsse  M.Hlur.-  ,n  ItaUe.  Paris,  1900.  A  good  account  for  the 
earlier  period  is  found  in   ChaiUey,  /.Vw/,!/  lur  U  Keienu.     Paris,  1884,  pp. 

219-345. 

In  Italian,  the  best  publication  is  O.  Quarta.  i\^mm,;,to  <Mi  I.,.z^f  suU'fmposta 
di  J^icH(zz,i  Mohile.  J  vols.,  Milan,  1902.  'nds  contains  the  laus  themselves, 
with  full  accounts  of  judicial  decisions  an.l  a  lininistrative  practice.  Other 
Italian  discussions  of  the  law  are  (jiuseppe  Vinci,  /: /mpo<l.i  ./,  h'i.kezza  MohU 
,„  Italia  ml  sua  I-unzimammh'.  Palermo,  1S9.;;  l.nrico  Uruni,  l^Imp.nta  su, 
KeJditi  di  Ki.'uzza  Mobile.  Milano,  1S94  ;  K.  Flora,  rhr.posia  sut  Kedditi  di 
An/iezza  Mo/'ih:  Mdan,  i;'.9S-.  Tivaroni,  /,•  Impost,'  IHictte  sutl.i  h'uhezza 
Mohiliare  e  ud Kedd,t,K  Rome,  1904;  and  A.  I.ia,  f  [mpo>ta  Mohiluu-e  e  In  A',- 
forma  dct  Trihuli  Dirett,  in  Italia.  OrJ,nament.^.  liinzio,,,;  Proposlc.  Turin, 
1906.  The  otticial  returns  are  published  annually  bv  the  /)/»v:„.».  Gmerale  delle 
Imposle  Dirette  e  del  Calasto.  The  n.o,t  important  of  these  fi-ures  are  repro- 
duced in  the  annal  of  statistics  known  as  .hnr.iario  .Statis/ico  Ital.ax.: 

A  summary  accoumin  Kn-lish  will  be  found  in  the  P.lue  Hook  entitled:  /V- 
ports/n>m  liis  .1/./ ■,-:tv's  A'epn-senfatirr  ahead r,.p,: /,//-  (iradnat.d  huome  7a.xn 
i„  J-ore,g„  Stairs.  London,  l./)5  ^C.l.  ^587^-  ' /•  '''^"  '^'-"""='"-  "/•  "'••  P"  '5°- 
1  C/.  iJruni,  op.  at.,  pp.  2,  3. 


340 


The  Income  Tax 


Cavoiir,  with  his  wise  prevision,  had  already  sent  his  friend 
Hroglio  to  iMigland  a  few  years  before,  in  order  to  study  the 
British  system,  and  the  results  of  Hroglio's  studies  were  made 
available  to  the  Italian  jjublic  in  1857.* 

Scarcely  had  the  new  government  been  inaugurated  when 
Bortogi,  in  1861,  suggested  a  general  tax  on  the  income  from 
personal  property.  The  time  was  not  yet  ripe,  however,  and 
in  1862  Minister  Sella  presented  a  similar  project,  with  an 
introduction  in  which  he  gave  a  clear  exposition  of  the  advan- 
tages of  the  scheme.'''  It  was,  however,  only  when  the  scheme 
had  been  presented  for  a  third  time,  and  now  by  the  new 
Minister  Minghetti,  that  it  was  finally  adopted  by  Parliament 
and  became  law  by  the  act  of  July  14,  1864. 

In  the  discussion  of  t!ie  law  the  chief  differences  of  opinion 
showed  themselves  in  the  choice  between  the  old  Italian 
systems  of  taxation  according  to  presumptions,  or  outward 
signs,  and  the  system  of  direct  assessment.  The  advocates 
of  the  second  method  won  the  day,  and  as  the  l.nglish  tax 
was  the  only  successful  one  then  in  operation,  the  English 
model  was  followed  rather  closely,  with  its  system  of  stop- 
page at  source.  The  Italian  tax,  however,  differed  from  its 
English  prototype  in  several  particulars.  In  the  first  place, 
whereas  the  English  tax  applied  to  all  incomes,  the  Italian 
tax  did  not  include  incomes  from  the  ownership  of  land. 
The  reason  for  this  distinction  is  not  far  to  seek.  When  the 
British  tax  was  imposed,  it  will  be  remembered  that  the  land 
tax  had  virtually  become  a  redeemable  rent  charge,  and 
that  as  a  consequence  in  a  large  part  of  the  country  no  burden 
was  imposed  for  slate  |)urposes  on  land  rents.  In  Italy,  on 
the  other  haiul,  the  real-estate  tax  was  the  most  important 
part  of  the  entire  system  of  taxation  on  product.  It  worked 
fairly  well,  and  no  one  desired  to  change  it.  The  income 
tax  was  therefore  applied  only  to  incomes  not  reached  by  the 
real  estate  tax.     In  the  second  place,  the  English  tax  was 

1  Kmitiii  liriiglio,  I ettne  >/<.'/'  /nifiosta  del  ReJdito  al  Conte  Camilla  di  Cavour, 
2  V'lN..  Turin,  i85f>-i8i;7. 

■■*  i/.  Uie  AfliizioHe  of  Sella,  printoil  in  liruni,  o/.  cit.,  p.  19. 


hA. 


The  Income   Titx  in  Ollur  Count,  ici         34 « 

levied  at  a  vuform  rate.     All  the  attempts  to  secure  a  tin- 
ferentiation  of  the  tax,  as  we  know,  hud  thus  far  failed.     In 
Italy,  however,  the  ar^'uments  of  the  two  committees  of  1H51 
and  is6i  on  the  Knglish  tax  had  made  a  great  impression, 
and  there  was  little  objection  t<-   .  differentiation  of  the  tax. 
As  a  matter  of  fact,  not  only  was  the  i-tinciple  of  differentia- 
tion introduced,  but  it  was  carried   m  ich  fui   ncr  than  had 
even  been  sug-ested  in  England.     In  the  third   place,  the 
government  was  in  such  immediate  need  of  a  definite  revenue, 
and  so  much  doubt  was  felt  as  to  the  yield  of  the  tax,  that  it 
was  made  not  a  percentage  tax,  as  in  I'.ngland,  -  i.e.  a  tax 
of  so  much  per  cent  on  income  — br    an  apportioned   tax. 
That  is,  it  was  determined  that  there  should  be  raiscil  by  the 
tax  a  sum  of  thirty  million  lire  which  was  to  be  apiiortioned 
among  the  different  provinces.*     The  provincial  quotas  were 
apportioned  in  the  same  way  among  the  communes,  and  the 
amounts  were  then  levied  upon  individuals  according  to  their 
income.     In  no  case,  however,  could  the  rate  of  the  individ- 
ual income  exceed  ten  per  cent. 

The  law  was  officially  called  "the  tax  on  the  income  of 
movable  wealth,"  but  was  popularly  termed,  "the  tax  on 
personal  property." '''  Subject  to  the  tax  were  corporations 
and  most  associations,  as  well  as  individuals.  The  tax  was 
imposed  upon  all  incomes  except  those  subject  to  the  real- 
estate  tax,  and  excepting  also  the  income  from  government 
securities.     This  last  exception  was  due  to  the  desire  of  the 

iThe  law  of  1S64  <lecrciMl  thai  the  tax  should  be  apportiuncl  t..  each  province 

according  to  tin-  following  ciiterii :  — 

(ine-liflh  ill  proportion  to  the  Ian  1  lax; 

One-lifth  in  1"  ip"f''"" '"^  l'"!''-''""""'  ,     . 

One-hfth  in  proportion  to  the  p.MMon.  and  salaries  paid  by  the  city,  .ind  the 

dividend".  I'f  corp..^atl■'n^; 
One-tenth  aecnrdiii^;  to  liie  customs  .luties; 
One-teruh  according  to  postal  and  teh>;riph  charges; 

One-tenth  according  to  the  stamp  tax;  .       ,        , 

One-tenth  in   proportion  to  the  nnkage  of  the  railways  and  the  national  and 
provincial  higluvavs. 
//,„A    A,  -w„    R.JMti    M-lla  Kx^he-.za    .VMU  .■    or,  for    short,  /w/.j/./    sulh, 

Ki.'ir:-:i  Molnlt. 


342 


The  Income  Tax 


government  not  to  depress  the  credit  of  the  new-born  state. 
The  principle  of  differentiation,  or,  as  it  was  called,  diversifica- 
tion {divvnijlcaziom)  was  applied  so  as  to  result  in  the  classi- 
fication of  incomes  into  three  categories:  (a)  the  si>-called 
permanent  and  spontaneous  incomes,  which  were  those 
derived  chieHy  from  property;  (/')  mixed  tempo, ary  incomes, 
which  were  those  derived  from  business  in  which  capital  was 
invested  ;  and  (c)  temjiorary  incomes  which  were  derived 
from  |)ersonal  exertion.  The  nominal  rate  of  tax  was  the 
same  in  each  class,  but  the  proportion  of  the  assessable  income 
varied.  In  class  A  incomes  were  assessed  at  the  full  valua- 
tion ;  in  class  H  they  were  taken  up  at  six-eif^hths  of  the  real 
income;  and  in  class  C  at  five-eighths.  Abatements  were 
made  for  the  smaller  incomes  as  follows:  Incomes  under  250 
lire  were  subject  only  to  a  fixed  tax  of  2  lire  —  reduced  to  I 
lira  where  the  ai)portionment  of  the  tax  resulted  in  a  rate  of 
less  than  four  per  cent.  These  revenues  were  also  not  sub- 
ject to  the  additions  for  local  purposes.  Incomes  from  250 
to  500  lire  were  taxed  on  a  rising  scale  beginning  with  a  tax 
of  2  lire  for  an  income  of  250  lire  until  the  normal  rate,  which 
could  not  exceed  ten  per  cent,  was  reached  at  500  lire. 
Everybody  was  compelled  to  make  a  declaration  of  all  his 
income  except  from  land.  Lists  of  taxables  were  made  out 
by  the  municipal  government,  and  were  ultimately  submitted 
to  certain  commissions  in  order  to  fix  the  assessments.  As 
far  as  possible  the  revenues  were  stopped  at  the  source. 

During  the  next  decade,  changes  in  the  law  were  made 
every  few  years.  In  1866  the  income  from  land  was  in- 
cluded, but  in  the  following  year,  1867,  under  Uepretis,  the 
original  scheme  was  reintroduced,  and  has  since  remained  in 
effect,  except  that  in  1870  the  income  from  agricultural  in- 
dustry, that  is,  from  the  working  of  land  as  opposed  to  the  in- 
come from  the  ownership  of  land,  was  inclu{le;l.  In  1866 
also  the  tax  was  changed  to  a  percentage  tax,  the  rate  being 
made  8  jier  cent  or,  with  one-tenth  added  for  expenses  of 
collection,  really  8.8.  In  1870  the  rate  was  increased  to  12 
per  cent  (or  with  the  one-tenth  added,  really  13.2).     Hut  this 


The  Income   Tax  in  Other  Countries         343 


■ii' 


11.     IC 

,   '  I  -.1 

It! 
:  i.  ^r.il 

c 

i       n 


increase  was  only  nominal,  because  the  atUlitional  centimes 
which  had  been  levied  for  local  purposes  were  now  abolished 
in  1870.  (iovernmcnt  securities  were  subjected  to  the  tax  by 
the  law  of  1868.  and  in  1870  the  principle  of  differentiation 
was  extended  by  the  introduction  of  a  fourth  category  (Sched- 
ule D),  for  the  income  from  pensions  and  the  salaries  of 
public  employees.  In  this  schedule  taxable  income  v-.s 
assessed  at  only  four-eighths  of  the  real  income.  / 
sa.-ries  of  private  individuals  were  taxable  under 
C  at  a  higher  rate,  this  would  seem  to  be  a  rati 
e.ven.pHon  ;  but  in  reality  it  is  to  be  explained 
that  public  officials  had  never  been  subject  to  '  i. 
centimes  for  local  purj)oses,  and  that  now,  wli> 
was  abolished  in  1870,  it  was  thought  wise  not  n  ■ 

burden    on   them.     Various  changes   also    w.        1,1  ' 
time  to  time   in  the  exemptions.     In   1867  the 
subsistence  was  raised  fiom  25'^  to  400  lire,   while  " 
frimi  400  to  500  l-re  enjoyed  an  abatement  of  lOO  lin  11 

declaration  was  st.ll  made  by  schedules. 

The  rate  of  the  tax  had  now  become  so  high  that  the  whole 
system  was  ho.ieycombed  wi.h  frauds,  and  abuses  of  various 
kinds  set  in.  la  1873  high  penalties  for  fraudulent  returns 
were  enacted,  and  in  1874  the  important  provision  was  intro- 
duced—a provision  which  has  since  been  followed  in  other 
countries  includip„'  England  -  that  all  employers  were  re- 
quired to  hand  in  the  names  of  their  employees  and  of  '*>e 
wages  paid.  The  law,  in  fact,  even  went  a  step  further,  and 
required  the  employers  to  pay  the  tax  for  the  employees. 

The  income  tax  as  a  whole,  however,  worked  rather  poorly, 
and  led  to  so  much  dissatisfaction  that  com.nissions  of  enquiry 
were  appointed  from  time  to  time  and  attempts  at  reform  were 
made.  Among  the  important  commissions  were  the  Corbetta 
commission  of  1872,  whose  report  led  to  a  few  mine:  reforms 
in  1874,  and  the  Torrigiani  commission  appointed  in  1876  by 
Depretis.  This  latter  commission  devoted  full  consideration 
to  two  propositions:  on  the  one  hand  to  introduce  the  principle 
of  graduation,  and  on  the  oi.ier  baud  to  convert  the  ta.x  into 


344 


The  Income  Tax 


a  general  income  tax,  with  the  corollary  that  all  other  direct 
taxes  be  repealed.  Both  of  these  propositions  were  negatived, 
and  the  commission  contented  itself  witb  a  number  of  re- 
forms, all  of  which  are  embodied  in  the  law  of  1877.' 

The  law  of  "JJ  made  comparatively  slight  changes  in  the 
substantive  provisions.  The  rate  of  the  tax  remained  the  same, 
namely  12  per  cent,  to  which,  however,  were  to  be  added 
the  onc-ten«:h  of  1868  (or  1.2  jier  cent)  and  a  further  addition 
calculated  at  2  per  cent  of  the  tax  for  expenses  of  administra- 
tion, as  well  as  a  further  local  duty,  varying  from  place  to 
place,  to  be  applied  to  the  collectors  to  whom  the  tax  was 
farmed  out.  The  total  rate  therefore  was  slightly  under  13  J 
per  cent,  i.e.,  13.2  per  cent  plus  the  additions.  The  abate- 
ments were  slightly  changed  so  as  to  be  as  follows  :  — 

250  lip'  on  incomes  from  400  to  500  lire ; 
200  lire  on  incomes  from  500  to  600  lire; 
150  lire  on  incomes  from  600  to  700  lire ; 
100  lire  on  incomes  from  700  to  Soo  lire. 

These  figures,  however,  applied  only  to  Schedules  V>  and  C. 
In  Schedule  O  the  old  system  still  continued.  As  the  other 
provisions  of  the  law  of  1877  are  virtually  in  force  to  day,  they 
will  be  considered  below,  and  we  shall  limit  ourselves  here 
to  calling  attention  to  the  chu.tges  introduced  by  the  laws  of 
1894  and  1907. 

In  1894  the  rate  of  the  tax  was  increased  from  13.2  per 
cent  (with  the  slight  additions)  to  20  per  cent.  The  reason 
of  this  was  an  effort  to  reduce  the  interest  on  the  public  debt. 
As  the  fi.scal  situation  at  the  time  would  not  admit  of  a  direct 
conversion  of  the  public  debt,  the  government  thought  it  would 
.secure  the  same  result  indirectly  by  increasing  the  rate  of  the 
tax.  But  in  order  not  to  augment  the  burden  on  the  other  tax- 
payers, the  proportions  in  the  other  schedules  were  reduced. 
Consequently,  in  Schedule  B  the  incomes  were  no  longer 
assessed  at  six-eighth;--  of  the  real  amount,  but  only  at  twenty- 
fortieths,  that  is,  one-half  ;    and  in  Schedule  C  incomes  were 


'  Law  of  August  24,  1877. 


The  Income   Tax  in  Other  Countries         345 

assessed  not  at  five-eighths,  but  at  only  eighteen-fortieths.     In 
Schedule  D,  incomes  were  assessed  not  at  four  eighths,  as 
before,  but  at  fifteen-fortieths.     This  would  practically  mean 
the  same  rate  of  tax  as  before.     Finally,  in  order  that  the 
government  securities  might  not  appear  to  be  singled  out  for 
higher  taxation,  Schedule  A  was  divided  into  two  parts  :  A-l 
was  now  made  to  include  not  only  government  securities,  but 
also  those  of  corporations  guaranteed  or  aided  by  the  govern- 
ment, and  state  lottery  premiums.    All  the  incomes  in  this  sub- 
class were  to  be  assessed  at  their  full  amount.      On  the  other 
hand,  a  new  sub-class  A-2  was  introduced,  consisting  of  other 
incomes  derived  from  capital  of  any  nature,  and  these  were 
now    assessed  at  only  thirty-fortieths  of  their  full  income. 
The  net  result  was  that  with  a  normal  rate  of  20  per  cent 
the  actual  rates  paid  by  the  different  schedules  would  be  as 
follows  :   A-i  20  per  cent ;    A-2  15  per  cent  ;    H  10  per  cent  ; 
C  9  per  cent ;    D  7]  per  cent.     The  law  of  1894  also  further 
complicated  the  abatements,  which,  with  the  additional  change 
introduced  in  1907,  will  be  explained  below. 

§  3.    T/ic  Actual  Conditions 

Coming,  then,  to  a  consideration  of  the  tax  as  it  exists  at 
present,  it  may  be  said  that  the  income  tax  applies  to  all  in- 
comes save  those  from  real  estate.  It  includes,  however,  in- 
come from  agricultural  industry  —  that  is,  from  the  tilling  of 
the  land,  but  only  in  case  these  agricultural  profits  are  made 
by  individuals  who  do  not  own  the  soil.  This  distinction  be- 
tween agricultural  profits  made  by  owners  and  by  non-owners 
is  of  course  as  illogical  as  it  is  unjustifiable.  The  tax  also 
applies  to  certain  revenues  like  tithes,  etc.,  which  are  not 
liable  to  land  tax.  Moreover,  the  farmers  who  work  the  land 
on  shares,  on  the  mctaytr  s\stem,  are  subject  to  a  tax  of  live 
per  cent  on  the  amount  of  land  tax  paid  by  the  land-owner 
when  it  is  over  fifty  lire.     Otherwise  they  arc  exempt. 

The    tax    is   payable  by  Italians  and  foreigners  alike,  by 
individuals  as  well  as  by  corporations,  but  only  on  incomes 


^^m^ 


"^rr- 


346 


The  Inco..te   Tax 


received  in  Italy.  Quite  a  discussion  took  place  on  this  point 
when  the  tax  was  first  imposed  in  1864  ;  but  at  that  time  the 
tiieory  of  taxation  was  still  that  of  reciprocity,  and  since  the 
government  was  not  supposed  to  protect  property  outside  of 
the  country,  it  was  decided  not  to  tax  incomes  therefrom.^ 
The  more  modern  view  considers  this  position  mistaken,  not 
only  because  it  puts  citizens  and  foreigners  on  the  same  plane, 
but  because  there  is  no  reason  why  a  citizen  who  happens  to 
invest  hi?  money  abroad  should  be  free  of  all  obligation  to 
the  state.^ 

The  tax  is  imposed  on  the  head  of  the  family,  including 
the  income  of  the  wife  and  of  the  minor  children.  The  legal 
exemptions  include  the  actuarial  rcser\'e  of  life  insurance 
companies,  the  income  of  mutual  aid  societies  (with  some 
slight  exceptions),  and  the  incmnc  of  the  royal  family. 
Charitable  institutions  are  not  exempt.  In  addition  to  the 
legal  exemptions,  however,  it  has  l)ecome  the  custom  virtually 
to  exempt  all  day  laborers.  According  to  Garelli,  the  law 
actually  reaches  only  about  I2,chx)  workmen.'  In  1897  the 
Minister  of  Finance,  Hranca,  desired  to  enforce  the  law  in 
the  case  of  ])rivate  laborers  as  it  is  already  enforced  with  the 
public  employees,  and  he  suggested  that  only  those  with  an 
income  under  three  and  a  half  lire  shouiil  be  exempted.  But 
the  law  failed  of  adoption,  and  when  the  same  principle  was 
sought  to  be  enforced  by  ministerial  ordinance  in  1899,  the 
decree  soon  became  a  deail  letter.^ 

The  incomes  subject  to  the  law  are  declared  to  comprise 
not  only  the  certain  and  fixed  incomes  ((■<■;•//),  but  also  the 
uncertain  and  variable  incomes  coming  from  busine^s  or  in- 
dividual exertion  {liircrti  and  ',;ii/ii/>!/i },  and  the  tax  is  stated 
to   be  applicable  on   the   basis  of   the  assured  or  presumed 


'  Bruni,  .;'.  .;/.,  ]>)>.  23,  24. 

''  I'f.  thf  ili>i  U'isiiiii  nil  ihtM  ji. lints  in  (  liaiUey, .'/.  </.'.,  p.  22  ?,  .in'l  Spdelbcrch, 
op.  ni.,  pji.  .^7  ,;'»• 

"  A.  (iarclli,  !r  liiip,'\t,-  lu-l'.'  S/,i/,'  .I/,i,/,  •  <;,).      Mil.in,  Kin^,  p.  158. 

*  ('/.  \Ia^;iini,  /.<■  /"//  ■/■•  I'l  h''-l:,---.i  M,->hilc  nei  A.i/y  ;/;  ■ ,  )i  !e  ScieU  Com- 
mr>\>,ile  o/>/i/i_i;'i/,-  ii/i',i  /'),■  riir.i    ,  ;/<■  ,/ri  /li/in,i.     .Milan,  l<j<Jj,  p.  1S9. 


The  Income   Tax  in   Other  Countries        347 


(pirsitttti)  incomes  of  the  individual.     The  tax  is  paid  in  three 
different  ways.     The  first  method  is  what  is  called  that  of 
holding  back,  or  retention  (riteiiiita).     For  instance,  the  tax- 
on  salaries  of  public  officials,  as  well  as  on  the  interest  of 
public  securities,  is  withheld  or  retained  by  the  government. 
A  sub-class  under  this  method  is  the  system  of  so-called  direct 
payments  {vcrs,unenti).     The  income  tax   due   from  savings 
banks,  the  Red  Cross  fund,  the  Sardinian  War  securities,  the 
fund  frum  whi.h  th<;  clergy  are  paid,  etc.,  is  also  withheld  or 
paid  directly   by   the  state.     The  second  method   is  that  of 
register  or  rolls  {iif.'/i  nomiwUivi),  that  is,  payments  made 
directly  by  individuals  who  are  put  on  the  tax  rolls.      Finally, 
in  the  case  of  corporations,  of  employers,  and  of  all  debts  in 
general,  the  tax  is  inscribed  on  the  register  not  in  the  name 
of  the  person  who  receives  the  income,  but  in  the  name  of  the 
person  who  pays  it  out.     Altiiough  the  names  api)ear  on  the 
register,  it  is  the  names  of  the  persons  who  pay  the  income 
and  not  of  those  who  receive  the  income.     This  method  may 
therefore  be  put  into  a  third  class,  and  is  sometimes  called 
the  method   of    ritntutii  di   rivaUa.     Strictly  speaking,  this 
method,  it  will  be  seen,  includes  .some  of  the  ciiaracteristics 
of  each  of  the  jireceding  methods.     Taking  the  first  and  the 
third  methods  together,  it  will  be  seen  that  the  principle  of 
stoppage  at  source  is  ajjplied  at  all  events  in   part  to  the 
Italian  tax. 

The  taxpavers  are  all  recpiired  to  make  their  declarations. 
After  the  amount  ot  gross  revenue  has  been  determined,  they 
are  red-iced  to  the  amounts  of  assessable  incomes  as  fixed  by 
the  law.  The  incomes  are  divitlcd  into  what  is  practically 
five  schedules.  Schedule  A-i  inchides  the  income  from  caji- 
ital  and  so-called  perpetual  revenues,  which  are  derived  from 
state  or  provincial  securities  or  loans,  including  government 
mortgages,  ground  rents,  and  fixed  annuities,  as  well  as  ir, 
come  from  securities  issued  by  cirpiorations  thai  .ire  guar 
.mteed  or  sidisidi/ed  by  the  state,  and  the  iiicome  from  lottery 
prizes.  In  this  schedule  the  incomes  arc  assessed  at  their 
full  amount,  and  liic  r.ite  is  tlieretore  twenty  jier  cent. 


348 


The  Income   Tax 


Hi 


Schedule  A-2  embraces  all  other  income  derived  from  capi- 
tal, and  all  other  perpetual  revenues  which  are  not  included 
in  Schedule  A-i.  Here  the  assessable  income  is  fixed  at 
thirty-fortieths  of  the  real  income ;  the  rate,  therefore,  is  really 
fifteen  per  cent.  Schedule  H  includes  the  so-called  temporary 
mixed  revenues,  —  that  is,  incomes  derived  from  the  coopera- 
tion of  capital  and  labor.  Practically  it  means  the  income 
derived  from  industry  and  trade.  Here  the  assessable  income 
is  fixed  at  tw.nty-fortieths  of  the  real  income,  —  that  is,  the 
rate  is  ten  pe;  cent.  Schedule  C  comprises  the  temporary  in- 
comes derived  exclusively  from  inclividual  exertiun,  such  as 
wages  or  jirofessional  earnings.  Hcio  the  assessable  income 
is  fixed  at  eighteen-fortieths  of  the  real  income,  the  rate  con- 
sequently being  nine  per  cent.  Schedule  U  includes  the 
incomes  from  pensions  and  salaries  paid  by  government  and 
the  wages  of  public  employees.  Here  the  assessable  income 
is  fixed  at  fifteen-fortieths,  that  is,  the  rate  is  seven  and  one- 
half  per  cent.  All  these  rates  are  increased  by  two  centesimi 
per  cent  to  cover  the  expense  of  verification  and  collection. 

The  abatements  are  fixed  differently  in  Schedule  D  from 
those  in  Schedules  V>  and  C,  and  are  arranged  according  to 
the  list  mentioned  above'  Hut  a  complication  is  introduced 
by  the  fact  that  in  the  case  of  incomes  subject  to  abatement, 
the  reduction  of  the  general  income  to  the  assessa!)le  income 
follows  the  old  figures  of  the  law  of  1877,  and  not  the  new 
figures  (-t  the  law  of  1894.  That  is  to  say,  the  "  net  reduced" 
incomes  are  arrived  at  by  reducing  the  incomes  in  schitlules 
U,  C,  and  L)  not  to  twenty-fortieths,  eighteen-lortietiis,  and 
fifteen-fortieths  of  their  actual  amount  respectivcK ,  but  to 
six-eighths,  five-eighths,  and  tour-eighths  respectively.  The 
consequence  is  that  in  Schedules  H  and  C  the  old  abatements 
of  250,  200,  150,  and  lotilire,  respectively,  bccatne  new  abate- 
ments ot  iG6.C)6,  133.33,  100,  and  66.66  lire.  For  instance, 
the  rccii)ieut  of  an  income  of  6cxj  lire  in  category  H.  who 
would,  according  to  the  calculation  of  i8c).|  lie  exempt  as  not 
havmg  the  mininunn   of  subsistence  of  400  lire,  is  actually 

'  Supr,i,  |ia^>:  ;544. 


The  Income   Tax  in  Other  Countries        349 


taxable  liccause  accordine;  to  tho  law  of  1877  his  assessable 
income  wutild  be  600  times  sixeigiiths  or  450  lire.  When, 
howe\er,  the  question  arises  as  to  what  the  abatements  should 
be  in  .such  a  case,  there  are  still  further  complications.  Ac- 
cording to  the  new  law  he  would  be  assessable,  i!  there  were 
no  abatement,  at  300  lire;  but  instead  of  deducting  the  old 
abatement  of  250  lire  from  these  StK)  lire,  there  is  now  abated 
only  the  sum  of  166.66  lire.  He  would  therefore  pay  a  tax 
of  20  per  cent  on  133.34  lire  (300-166.66),  thai  is,  he  would 
pay  about  2-j  lire.  The  same  would  be  true  of  otiier  abate- 
ments.' 

When  we  come  to  the  administrative  features  of  the  tax, 
we  arc  confronted  by  several  interesting  tacts.  The  list  of 
persons  subject  to  the  tax  in  each  commune  is  supposed  to  be 
prepared  annually  by  the  municipal  council  (giiiiita  mitnici- 
i)alc).  If  prepared  with  care  this  would,  of  course,  be  of  very 
great  value ;  but  as  a  matter  of  fact,  the  lists  are  scarcely  ever 
revised,  and  are  of  little  u.se.  The  chambers  of  commerce  in 
the  different  towns  are  legally  required  to  notify  the  .uithori- 
ties  of  the  formation  of  any  new  cortiorations  or  the  opening 
of  any  new  business,  and  the  notariis,  as  well  as  the  registers 
or  managers,  etc.,  are  supposed  to  send  tr-  tli>;  tax  office  a  list 
of  all  documents.  Moreover,  the  court  officials  are  prohibited, 
under  severe  penalties,  from  taking  note  of  any  document 
which  is  not  shown  to  have  paid  the  ix.  As  a  matter  of 
fact,  however,  this  penalty  has  never  been  a[)i)iied.'-  Kvery 
taxiKiyer  is  also  compelled  to  make  a  declaration  of  his  in- 
come, under  heavy  penalty;  but  in  practice  the  penalty  is  not 
enforced,  and  he  therefore  never  does  so.  As  a  result,  the 
officials  (agenti  dclle  imposic)  have  either  to  depend  upon 
the  indirect  payment  of  the  tax.  that  is,  in  those  cases  where 
the  tax  is  stojjjied  at  the  source,  or  they  have  to  make  their 
own  assessment  in  all  cases  of  the  direct  taxation  of  the 
individual.  The  tax  agents,  therefore,  almost  universally 
make  the  assessment  of  the  income  them.sclvcs.     The  assess- 


%, 


'  Ct.  f'T  nihi-r  .all  iil.iti -ns  S|MR-ll.t;rtli, 
-  S|Midb  rcli,  op.  ill.,  |>.  IJ7. 


.(/,pp.  SS-92 


350 


The  Income  Tax 


mcnt  was  only  recently  made  on  the  average  of  the  two  pre- 
ceding years,  in  the  case  of  private  business  or  unlimited- 
liability  companies;  on  the  income  of  the  current  year,  in  the 
case  of  incomes  from  securities,  pensions,  and  fixed  allow- 
ances ;  and  on  the  basis  of  the  business  year  ending  in  the 
preceding  July,  in  the  case  of  banks  and  limited-liability  com- 
panies. In  K)07,  however,  the  biennial  valuation  was  changed 
to  a  quadricnnial  vakiatioii,  to  the  extent,  at  all  events,  that 
the  government  itself  cannot  change  tlie  valuations  for  four 
years,  while  the  taxpayer  still  has  the  right  of  altering  the 
valuation  at  the  end  of  two  years. 

Originally,  when  the  income  tax  was  an  apj)ortioned  ta.x, 
the  assessment  of  the  shares  payable  by  individuals  was  con- 
fided to  a  commission  of  citizens  elected  by  the  local  council. 
When  the  tax  bci  le  a  personal  tax,  the  government  en- 
assessment  to  the  fiscal  agent,  although 
commission,  to  which  references  will  be 
IS  also  given  the  right  of  aiding  the 
.ssessments.  As  a  matter  of  fact,  hovv- 
never  utilized  this  right,  so  that  the 
;aiids  of  the  tax  officials.' 
">us  r:''i;  of  taxation,  the  fiscal  agent  is 
lem:  Is.  He  scarcely  ever  thinks  of 
;  act  income  at  the  real  figures,  and 
nicabic  understanding  with  the 
ixpayer  objects  to  the  assess- 
•nuer,  he  may  ajjpeal.  There  are 
ministrative  and  judicial  appeal, 
entrusted  the  adniiuistrative  ajipcal 
consist  of  three  kinds  of  commissions.  The  commission  of 
first  instance,  or  communal  ioimnission,  is  comjiosed  of  a 
presiding  officer  ajipojnted  by  the  prrt-ct,  and  ot  lour  mem- 
bers elected  bv  the  communal  council.  This  commission  often 
divides  itself  into  sub-commissions  aiul,  being  generally  tavor- 
ablc  to  the  taxpayer,  ortlinarily  reduces  the  a.ssessment  as 
fixed   by  the   fiscal  agent.       l-'.ither   party  may  then    appeal 

'  .'^pui.lhiTch,  Lp.  >.it.,  p.  130. 


trusted  the  matter 
a  little  later  the  1. 
made  in  a  11 
fiscal  agent  t' 
ever,  the  coi:     .1 
matte     rests 
0\vui_  til 
very  1.1 1. 
assessing 
he  gener 
taxpayer, 
ment  levied  by  th 
two   kinds  of  appeal 
The  bodies  to  which 


ti 

c 

in 

■>o•^ 

)mi 

ho 


The  Income   Tax  in  O titer  Countries        351 


within  twenty  days  to  the  provincial  commission,  consisting 
of  five  members,  one  of  whom  is  nominated  by  the  provincial 
council,  one  appointed  by  the  chamber  of  commerce  of  the 
province,  two  ai)pointed  by  the  department  of  direct  taxes, 
and  one,  who  presides,  by  the  prefect.  As  the  majority  of 
this  commission  represent  the  government  rather  than  the 
taxpayer,  they  generally  take  the  opposite  attitude,  and  ordi- 
narily uphold  the  fiscal  agent  as  over  against  the  communal 
commission.  A  third  and  final  appeal  is  possible  to  a  central 
commissitm  of  twelve  members,  appointed  by  the  government. 
This  central  commission  nut  only  acts  as  a  court  of  appeal, 
but  also  takes  up  in  the  first  instance  other  questions  like 
that  of  double  taxation.  This  exhausts  the  possibility  of 
appeal  on  questions  of  fact,  but  on  questions  of  law  a  further 
appeal  is  possible  to  the  courts,  and  in  Italy  there  are  no  less 
than  five  such  instances  of  appeal. 

In  making  their  assessments  the  fiscal  agents  have  broad 
powers.  They  are  permitted  to  do  seven  things :  ( i )  they 
may  demand  from  the  public  officers  an  extract  of  any  docu- 
ment which  they  need;  (2)  they  may  summon  any  taxpayer 
to  appear  befoie  them  for  examination;  (3)  they  are  allowed 
access  to  any  industrial  or  commercial  establishment ;  (4)  they 
may  sujnmon  to  their  office  anybody  who  they  think  can  give 
ihem  information;  (5)  they  may  examine  the  ledgers  or  reg- 
isters of  certain  companies  known  as  anonymous  societies 
(the  French  compagiiifs  en  commandite);  (6), they  may  de- 
mand inspection  of  securities;  and  (7)  they  may  consider 
the  house  rent  paid  by  the  individual. 

While  they  have  the.'^e  rather  considerable  powers,  as  a 
matter  of  fact  they  very  rarely  make  use  of  any  except  the 
last;  and  accordingly  they  guess  at  tlie  individual  income 
very  largely  on  the  basis  of  the  house  rent  and  the  mode  of 
living.  In  other  words,  what  was  meant  to  be  a  system  of 
direct  taxation  of  income  has  bcconie  in  practice  a  metliod 
of  assessment  based  upon  prcsuniptions  or  outward  signs. 

l''ina;iv,  it  mav  be  stated  that  the  tax  is  collected  not  hy 
the  government  officials  themselves,  but  by  contractors  to 


W 


352 


The  Income   Tax 


whom  the  collection  of  the  revenue  is  farmed  out,  in  return 
for  a  proportion  of  the  tax  collected,  which  must  nut  exceed 
six  per  cent.  The  contract  usually  lasts  for  ten  years,  and 
is  put  up  for  public  auction  in  the  communes. 


§  4.    The  Question  of  Fraud 

When  we  con.sider  the  actual  working  of  the  Italian  law, 
we  find  that  notwithstanding  the  many  admirable  provisions 
which  it  contains,  the  tax  rates  are  so  enormously  high  that 
evasion  and  fraud  arc  almost  universal.  Almost  from  the 
very  begiiming  of  the  high  rates  complaints  of  fraud  were 
heard,  and  these  have  not  been  diminishing  in  recent  years. 
In  1893,  for  instance,  we  are  told,  "a  large  part  of  incomes, 
perhaps,  in  fact,  the  greater  part,  comi)letely  escapes  taxa- 
tion." '  So  notorious  have  these  frauds  become  that  a  spe- 
cial study  of  this  subject  has  recently  been  made  by  a 
Frenchman,  Perdrieux,  in  a  most  interesting  volume,  to 
which  the  present  prime  minister  of  Italy,  Sig.  Luzzatti, 
contributes  a  preface.'^  We  are  told  that  the  officials  are 
at  least  honest.  Luzzatti  emphasizes  the  fact  that  the  gov- 
ernment has  succeeded  in  eliminating  the  "  fraud  of  frauds," 
—  that  is,  the  favoritism  due  to  political  or  religious  reasons. 
"  In  It.ily,"  says  I-uzzutti,  "if  we  have  not  attained  the  ideal, 
wliich  belongs  to  heaven  and  not  to  earth,  every  taxpayer 
at  least  has  the  ass',  'ance  that  sncii  stormy  passions  do  not 
enter  in  the  least  into  the  assessment  of  taxes."''  More  than 
that  is  mit  i  liimed,  even  by  Luzzatti.  He  speaks  of  Minister 
Sella  as  the  real  author  of  this  "code  of  financial  torture  " 
While  ho  maintains  that  the  taxpayer  in  Italy  is  "the  most 
perii)atctic,  the  most  admirable,  and  the  most  patient  human 
animal  known  in  fiscal  history,"  he  also  finds  a  limit  to  the 
sacriiices  that  can  be  made,  and  agrees  that  "  the  tendency 

'  Vini-i,  .'/.  ,  I/.,  |i.  20. 

-'  /  fs  /r,ni,/,i  ,itiii-  r  hnpvt  Italirn   \ur  les  f\r~r>ius  Je  l,<  Ki.hf^se  M''iltrre, 
A-.f,  titif  I  lit'  e-l'ri.i.i  Je  M.  Liitj^  Itnzitttt.    I'ar  Pierre  IVrilitux      Hans,  luio. 
•  (>.*.  w/.  n.  S. 


The  Income   Tax  in  Other  Countries         353 

to  fraud  develops  in  proportion  to  the  fiscal  greediness 
(I'dpnti'  f Stale)  with  which  the  taxpayer  is  afflicted."  Li.j- 
zatti  refers  to  the  attempts  made  by  the  government  to 
change  the  law  or  the  customs,  and  points  out  that  they  all 
failed  in  the  presence  of  the  outcry  on  the  part  of  the  tax- 
payer. As  he  wittily  remarks:  "We  officials  carry  on  art 
for  art's  sake,  but  the  taxpayers  carry  on  art  in  order  to 
live."*  In  Italy  only  about  four-tenths  of  the  tax  is  col- 
lected by  stoppage-at-source,  so  that  in  the  greater  part  of 
the  tax  the  door  is  wide  open  to  fraud.  Wc  are  told  that 
perhaps  the  worst  frauds  are  found  in  the  professional 
classes,  where,  as  Luzzatti  again  so  well  i)Uts  it:  "the  diver- 
sities and  the  'undulations'  of  conscience  attain  a  degree 
of  refinement  of  which  the  higher  talents  alone  are  capable. 
The  common  people  are  always  more  frank."  '^ 

Where  declarations  are  made  by  the  ordinary  businessman, 
they  are  notoriously  inadequate.  Obviously  an  income  ta.\ 
running  up  to  fifteen  or  twenty  i)cr  cent,  to  which  all  manner 
of  high  local  taxes  are  to  be  added,  would  indeed  be  unen- 
durable if  enforced  to  the  hilt.  Satisfactory  arrangements 
arc  therefore  usually  made  between  the  individual  and  the 
fi.scal  agent.  Rut  for  a  great  mass  of  income  from  personal 
property  the  agent  has  no  means  al  all  of  estimating  the  real 
income.  He  docs  not  dare,  as  wc  have  seen,  to  use  his 
powers,  for  such  an  attempt  would  lead  to  a  revolution-  and 
so  far  as  the  owners  of  securities  are  concerned,  they  either 
have  to  put  their  money  into  foreign  securities,  which  as  we 
have  seen,  bv  a  great  defect  in  the  law,  arc  not  tax.ible  at  all, 
or  thev  can  deposit  their  securities  in  private  hanks  or  in  the 
particular  kind  of  comi)anies  which  are  not  in  any  way  subject 
to  inspection  by  the  officials.     The  consequence  is  that  the  ad- 


'  "f'est  que  nnus  aiitr.w  Imanciors,  nnu'^  fai- -ns  ic  I'art  i>.:ui-  I'art,  et  i|uc  Irs 
contril'uablcs  O'lit  '\c  I'arl  |'"ur  l.i  \!i-."  —  '  /.    ;l..  |-  7. 

-  riic  pr"fi -Mi.nal  tlas«i<  ••  oi'i  ks  •  .lixfi-iitCs  '  <  t  U-s  '  ..lul.i.-ir.f  ni^  '  .Us  i  on- 
sii.ii.rs  .Utii}»ni'nt  c^-s  .li'-ri>  .K-  hiio^c  ■'  iii  -cu'cimTil  Ir-  taUiit^  ^ii|ii'tifUi-, 
:..:-,(  .  .ipalil.'*.  I.c  yi-MyV-  la"-;  *.i  riiH.svr  .  -t  t..ir:.urs  ]  lus  \\\^(n\i  il  plu«  liaiu  ." 
(■/.  .lis.,  --p.  .  M.jRh,  ...r  .,•.'..  !•.  l.\'t  an.l  111  j;..-!.,  i.d  l.ia,  ./.  .;.'.,  \i\<.  loo-I.M. 


354  Tf^^  Income   Tux 

ministration,  disarmed  not  only  by  law  but  also  by  the  force 
of  iniblic  opinion,  is  i)racticaiiy  unable  to  control  the  assess- 
ments, and  contents  itscU  with  making  a  rou^h  fjuess  based 
very  largely  on  house  rents.  Scarcely  any  one  tliinks  ol  mak- 
ing an  himest  return  ot  his  income,  and  no  one  '>clieves  that 
the  tax  represents  any  real  approximation  to  thr  actual  (  ipac- 
itv  of  the  individual.  This  results  in  shocking  iiieiiualities  as 
between  individuals  and  a  complete  disorganization  of  the 
revenue.  .And  yet,  such  as  it  is,  the  government  is  unable 
to  dispense  with  the  income  tax,  which  forms,  with  all  its 
shortcomings,  a  relatively  important  part  of  the  revciuie  sys- 
tem. In  19C7,  for  instance,  the  income  tax  yielded,  in  rough 
figures,  275,000,000  lire,  out  of  45.S,ooo,iX)o  derived  from 
direct  taxes  in  general,  and  as  against  1,187,000,000  tlerived 
from  indirect  taxes,  ami  30<S,ooo,ooo  from  other  sources.' 

Hut  when  we  compare  the  Italian  income  tax  with  cither 
the  Mnglish  or  the  Prussian,  these  figures  are  iusignifit  mt. 
It  is  true  that  income  from  real  estate  is  not  included,  and  it 
is  of  course  true  that  Italy  has  less  wealth  than  Knglaiul  or 
Germany.  Hut  with  a  tax  rate  four  to  five  times  as  high  as 
in  iMigland  or  Germany,  the  total  yield  is  less  than  half  of 
what  it  is  in  Germany  and  less  than  a  third  of  what  it  is  in 
England. 

It  was  thought  at  one  time  that  these  immense  frauds 
might  be  stoi)|)ed  by  publishing  the  lists  of  the  taxpayers, 
but  so  ingra-ned  has  the  habit  of  under-assessment  become  in 

'  Tlip  \irl.i  i.f  t!,c  Il.ili;in  iiKMiiu'  t;i\  at  ilillfrfiit  I'vrinU  li.i-.  lirrn  a*  f.Ml.iws: 

iSi  4    ii.inii'i^         14.7'Mi,iii)7  lir>- 

l«0<i        lji,o7S,i(K)  lirf 

iSyo        S.»,7<)7,J  iS  lire 

1S77        lS4„S3.),ii4l  lire 

lSi>(>        .          2  iO,6i>o,(xx)  lire 

1S9S        Z^','i\ofioo  lire 

Ic^j        2S9,o(io,t«o  lire 

l<^i(,        ;n5.(XX).ooo  lire 

nuiy        a7j;,ixxj,cxx)  lire 

1910    ie-liiii.ili  i         .      .  2i.7.i'<x>,<K()  lire 

ThefallintJ  oil  in  1907  ua-.  iliie  totlie  coiu.  isi.m  nf  ili  Italian  ilebt  at  a  lower 
rate  of  interest. 


The  Income   Tax  in  Other  Countries 


355 


Italy  that  the  publicity  of  the  returns  has  made  virtually  tio 
dit'ference.  The  only  thinj;  that  would  surprise  an  Italian 
would  be  to  ascertain  that  his  ncij;hl)or  had  either  declared  his 
real  income,  or  had  been  assessed  in  any  degree  comparable 
to  his  real  income. 

Our  general  conclusion,  therefore,  must  be  that  while  the 
Italian  income-tax  law  possesses  some  admirable  features, 
such  as  the  stop|)age-at-sourco  provisions  and  the  principle 
of  differentiation  of  revenues,  the  tax  rates  have  become  so 
enormous  that  the  administration  has  broken  dow  n  under  the 
weight,  and  that  the  public  conscience  has  given  way  to  an 
equal  extent.  The  Italian  income  tax  is  a  signal  proof  of  the 
folly  of  the  attempt  to  tax  incomes  at  anything  more  than  a 
very  modest  figure. 


§  5.    Szvitzcrland 

The  Swiss  cantons  rely  to  a  very  large  extent  on  the 
general  projierty  tax  as  the  chief  source  of  revenue.  This 
was  the  medi.xval  system,  and  disappeared  only  gradually 
with  the  dominance  of  the  aristocratic  (iiSihlfclitcr  in  the 
seventeenth  and  eighteenth  centuries.  When  the  .Swiss 
democracy  again  came  to  its  own  in  the  nineteenth  century, 
the  old  general  projjerty  taxes  svere  every  where  reintroduced, 
with  this  differiiice,  however,  that  they  were  now  gradually 
supplemented  in  some  cases  by  cantonal  iiicome  taxes,  and 
that  the  sysiem  of  progression  was  apj)iied.' 

'  An  account  uf  the  .Irvi  li.|iniciit  i^f  tlic  |irii|uMly  taxts  an. I  a  .UlaiU-.l  tahlc  uf 
the  rales  of  tho  cxistint;  |ir-|>(rty  ami  in.  .mo  t,i\c>  in  rvirv  .anion  m  >wit/ir- 
lanil  will  be  found  in  Seligman,  I'ti^rfi'ie  I'.i.xiIimi.  2.I  cl  .  yy.  02  77.  The 
throe  liest  books  on  the  (general  subjoit  ol  Swiss  property  aul  01.  oiu.-  t.i\<s  arc 
Schan/,  />;>  SUiitni  J,r  Sihicei:  I'l  i/ii.r  E)it:viJ;  iiii^  -rit  /u\;iiii  t/f.  /.? 
Jahrhtiiulcrls.  Stntt^;art,  l.Scio.  5  vols.;  M.  ilo  (  er^nxill". /- >  Imr-'m  ,11  Siiis.e. 
Lausanne,  lS>),S;  ami  j.  Steigrr.  (iiuii./.ii^i  ./<  ■  I ni<iirJi,iH'h,u:.  •/,  1  k'nil.ne 
iiiiJ  CgnieinJen.  2  vols,  liern.  l'H>t.  1  if  stuli.s  i,n  the  s.'parale  cantons  the 
best  for  the  earlier  perioil  is  Karl  I'.ii.licr.  />',/,i,-,".  .SV,;,;/i. //(//.;<■  w//  un.i  Sr  :i,  ■  ■ 
rertheiliiii^.  Ibsel,  l.SSS  ;  an  I  f..r  the  in..r<  recent  p-ri..  1  11.  I'm-!, /'/.  .■/'  kini 
StiiiilsslfUfrit  J,-i  A'.ni.'"ii<  /Hi  I.''  1  "i  i,,:iir.fli)]t,>t  /.n'n'iuii.i,  r/  Winterthur, 
li^oj;   and  Ksslen, /.>/■■  .('/'i<'.'c//  :^t,u:.ii  im  \':i:/r/i  /in  iJi.     /.mw\\,  lyio. 


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356 


The  Income  Tax 


The  introduction  of  the  income  tax  as  a  supplement  to 
the  general  property  tax  was  due  to  the  experience  of  the 
larger  cities  and  to  the  recognition  of  the  fact  that  the 
system  of  property  taxation  f  lils  to  reach  professional  and 
other  earnings  from  personal  exertion  which  bulk  so  large 
in  modern  times.  In  one  locality,  in  fact,  Baselstadt,  the 
income  tax  was  introduced  first,  namely  in  1840,  and  was 
supplemented  by  a  property  tax  only  at  a  later  period. 
Everywhere  else,  however,  the  income  tax,  where  it  exists 
at  all,  was  introduced  to  round  out  the  property  tax. 

At  the  present  time  there  are  several  systems  in  vogue. 
In  the  first  place,  we  find  the  general  property  tax,  supple- 
mented by  a  tax  on  the  income  from  property  as  well  as  from 
labor.     This  is  the  system  in  vogue  in  Baselland,  in  Solothurn 
and  in  Ticino.     The  second  group  of  cantons  is  composed  of 
those  that  have  a  general  property  tax,  but  only  a  labor  in- 
come tax.     These  include  a  majority  of  the  Swiss  cantons,  or 
precisely  thirteen  out  of  twenty-five;  all,  in  fact,  except  those 
specifically  mentioned  in  the  other  categories.     In  these  can- 
tons the  income  tax  plays  a-i  entirely  secondary  rAle,  and  is 
levied  for  the  most  part  only  on  labor  incomes  and  pensions. 
This  is  true   more   especially  of  Aargau,  Appenzell-a.-Rh., 
Graubiinden,  Obwaklen,  St.  Gallen,  and  Schaffhausen.     In  a 
few  cantons  there  is  a  slight  deviation  from  the  general  rule. 
Neuchatel  includes  the  revenue  from  real  estate  outside  of  the 
canton.     Freiburg,  which  exempts  from  the  property  tax  se- 
curities of  corporations  engaged  in  commerce  and  industry, 
includes  in  the  local  income  tax  business  incomes  as  well  as 
labor  incomes.     (3)  The  third  class  of  cantons  have  only  the 
general  property  tax  and  no  income  tax  at  all.     These  arc 
Nidwalden,    Glarus,    Appenzell-a.-Rh.,    Geneva,    and    Vaud. 
Vaud,  however,  has  a  business  tax  {GciijcrbcstcHcr)  instead  of 
the  income  tax.     Schwyz  stands  midway  between  the  second 
and  the  third  class,  in  that  it  possesses,  in  addition  to  the 
property  tax,  a  tax  levied  on  incomes  from  pensions  and  from 
dividends  on  capital.     Finally,  a  fourth  class  is  represented 
by  Bern,  which  has  a  general  income  tax  but  no  general  prop- 


The  Income  Tax  in  Other  Countries 


357 


erty  tax,  with  the  exception,  however,  that  in  the  caso  of  real 
estate  and  of  the  mortgages  thereon,  the  property  and  not  the 
income  is  assessed. 

The  prevalent  Swiss  system,  therefore,  may  be  said  to  con- 
sist of  a  property  tax  together  with  a  tax  on  labor  incomes. 
The  two  taxes  together  thus  reach  the  entire  income,  the  one 
the  income  from  property,  the  other  the  income  from  labor. 
This  principle  is,  however,  not  carried  out  everywhere  with 
precision;  for  in  Lucerne  real  estate  is  subject  not  only  to  the 
property  tax,  but  also  to  an  income  tax  under  the  name  of 
Katastcrstcner,  which  is  the  survival  of  a  tax  that  can  be 
traced  back  to  1699.  Moreover,  in  Thiirgau  and  Uri,  when- 
ever the  interest  on  capital  exceeds  four  or  four  and  one-half 
percent  respectively,  the  surplus  income  beyond  that  figure  is 
taxable  by  the  income  tax  also.  In  the  four  cantons  of  the 
hrst  category,  however,  including  Basel,  the  supplementary 
income  tax  is  added  to  the  property  tax,  so  that  the  owner  of 
property  pays  both  property  and  income  tax.  This  results, 
of  course,  in  the  fact  that  incomes  from  property  are  taxed  at 
a  higher  rate  than  incomes  from  labor,  thus  effecting  a  differ- 
entiation like  that  recently  introduced  into  England. 

The  rate  of  the  income  tax,  where  it  exists,  is  on  the  whole 
a  very  moderate  one,  being  in  most  cases  only  two  per  cent. 
This  is  due  to  the  fact  that  it  serves  as  a  tax  supplementary 
to  the  property  tax,  the  rates  of  which  are,  in  some  of  the 
cantons,  very  high.'  In  Bern,  however,  where  it  will  be 
remembered  the  income  tax  is  the  chief  tax,  and  where  there 
is  no  general  property  tax,  but  only  a  tax  on  land,  the  rate  on 
the  income  tax  is  much  higher,  rising  in  the  various  grades  to 
about  six  and  one-half  per  cent.  The  custom  of  progression  is 
found  in  most  of  the  cantons  that  levy  the  income  tax,  except 

•  The  details  for  both  the  property  tax  and  the  income  t.ix  for  each  of  the 
separate  eantons  will  be  found  in  SeliKiiinn,  Pro^rasive  laxation,  zA  ed.,  pp. 
*^7-73-  .Vtteiition  ouylit  to  lie  called  t"  the  misprints  whcrel-y  the  rate  of  the 
l>roperty  tav  in  Appen/,ell-a.-Rh.,  ISaselstadt,  Lucerne,  Solothurn.  and  Vaiid,  is 
printed  as  "\,  instead  of  o/oo,  i.e.  the  r.ates  on  property  are  so  much  per  mill,  not 
so  much  per  cent.  The  ligures  fur  the  income  tax  are  correctly  printed  '/(„  i.t-  so 
muc!:  :;cr  ce:il. 


I     I 


•jOK^wnzsEfii^z-^Sfi'ss^^sBm^A  .4KK.  i:)a.s';urcHnKuV  « 


358 


The  Income  Tax 


in  Bern  and  in  Neuchatel;  but  even  where  it  exists,  the  max- 
imum rate  is  comparatively  low.  The  system  of  impositions 
and  abatements  for  lower  incomes  is  widespread.  Finally, 
the  income  tax  applies  generally  to  corporations  as  well  as 
individuals ;  but  the  taxation  of  corporate  incomes  is  exceed- 
ingly varied.  In  some  cantons  corporate  incomes  are  taxable 
and  the  shareholders  are  exempt ;  in  others  both  corporations 
and  stockholders  are  taxable  on  the  same  income;  in  still 
others  the  system  in  vogue  is  that  of  taxing  corporations  on 
incomes  above  a  certain  normal  figure,  which  is  supposed  to 
represent  the  income  of  the  security  holders.  The  latter  sys- 
tem, it  will  be  remembered,  is  the  one  that  has  been  adopted 
in  Prussia  and  some  other  German  states. 

The  point  of  chief  interest  to  us  is  the  administration  of 
the  law.  As  to  this,  it  may  be  said  that  on  the  whole  the 
income  tax,  especially  in  the  industrial  centres,  works  just 
about  as  badly  as  the  general  property  tax,  or  in  fact  is  still 
more  unsuccessful  than  the  general  property  ta.v. 

With  reference  to  the  general  property  tax.  the  system  is 
almost  as  notorious  as  in  the  United  States.  In  Switzerland, 
as  in  the  United  States,  the  greater  the  population  and  the 
industrial  development,  the  more  defective  is  the  administra- 
tion of  the  general  property  tax.  In  the  smaller  towns  and 
in  the  agricultural  districts,  where  more  primitive  economic 
conditions  still  continue,  the  property  tax  works  fairly  well. 
In  the  larger  cantons  the  reverse  is  true.  There  are  in 
Switzerland  only  four  cc-tons  with  a  population  of  over 
250,000  people, —in  their  order,  Bern,  Zurich,  Vaud,  and  St. 
Gallen.i  In  most  of  th'ese  places  the  growing  needs  of  the 
communities  and  the  reliance  to  a  very  great  extent  on  the  gen- 
eral property  tax  as  the  chief  source  of  revenue  have  brought 
about  a  nominal  rate  of  ta.xation  comparable  to  that  of  the 
United  States,  where,  if  honestly  assessed,  the  property  tax 
would  take  from  one-third  to  one-half  of  the  entire  income. 
Under  such  conditions,  of  course,  failure  is  inevitable.     In 

'  .\ccor<ling  to  the  census  of  1904  the  population  was  as  follows  :  Hern,  606,000; 
Zurich,  4?  1,000;   Vau'!,  2i)0,ooq:   St.  GaUcrs.  2;!;  rsrx!. 


The  Income   Tax  in  Other  Countries         359 


the  report  of  the  canton  of  Zurich,  for  instance,  where  it  be- 
came possible  to  check  up  the  returns  from  the  j^eneral  prop- 
erty tax  by  means  of  the  inheritance  tax,  it  was  stated  that 
in  1897  only  fifty-four  per  cent  of  the  property  was  reached.' 
In  an  address  on  the  question  of  fraud,  that  was  given  by 
one  of  the  officials  in  1895,  a  careful  analysis  was  made  of  the 
situation,  with  the  conclusion  that  the  frauds  increase  four 
times  as  fast  as  the  wealth  increases.^  A  few  years  later 
Professor  Wolf,  who  declared  the  property  tax  the  "  child  of 
soxTovi"  {Sc/aiicrzcHskind )  of  all  tax  reformers,  stated  that 
where  the  tax  rates  were  felt  to  be  too  high,  the  taxpayers 
found  the  natural  corrective  in  under-assessment."  The  situ- 
ation has  not  improved  at  the  present  day.*  In  Bern,  the  con- 
ditions are  not  much  better,  and  we  are  told  that  in  Appen- 
zell  and  St.  Gallen  there  is  no  thought  at  all  of  an  honest 
assessment.''  In  other  cantons  the  inhabitants  look  upon  it 
as  something  that  goes  without  saying,  that  they  should 
declare  not  more  than  one-third  of  their  income ;  and  in  still 
other  places  it  has  become  the  custom  for  the  assessors  to 
ask  the  taxpayers  directly  as  to  how  much  they  care  to  pay. 
This  is  especially  true  where  the  rate  of  the  property  tax  is 
so  high  that  it  is  virtun.Uy  impossible  to  pay  it. 

Even  where  the  rates  are  not  so  very  high,  the  situation  is 
not  much  better.  Everywhere  in  Switzerland,  we  are  told, 
the  people  are  tired  of  taxes.^  Moreover,  the  use  of  the 
general  property  tax  both  for  local  and  for  cantonal  purposes 
has  brought  about  the  same  result  as  in  the  United  States, 

1  I '";   Steiger,  op.  cit.,  p.  70. 

^  •' Hieraus  wird  der  Schluss  abgeleitet,  ilas  die  V'erhcimlichung  mit  zuneh- 
mendem  Reichtum  nicht  nur  proportional  sondern  fast  in  (luadrati^chiMn  Verhalt- 
niss  anwachse."  —  J.  Walder,  Ktfcrat  vor  </er  I'ersammluiii^  der  KantonnUn 
j;,-ineinniUzigen  Gesellscluift  zu  Biilach,  (|uott;d  in  Ernst,  Die  Jiirei-ten  Staats- 
sleuern  lies  Kanlon  /.iirich.     Wintenhur,  1903,  p.  209. 

'  Die  Slenerreform  im  Kanton  '/iirich,  von  Dr.  Julius  Wolf.  Zurich,  1897. 
Quoted  in  Ernst,  op.  cit.,  p.  210. 

*  Esslen,  Die  direklen  Steuern  im  Kunlon  Ziiric/i.     Zuricli,  1910,  pj).  33  et  seq. 

'"Von  einer  ehrlichen  Versteuerung  gar  keiiie  Rede  sein  kann."  —  Steiger, 
op.  lit.,  p.  72. 


'  Ubciuil  in  dcr  .Schwciz  ist  raann  stcucrsatt."    -  Op 


•I     P-     -J  — 


36o 


The  Income  Tax 


namely,  the  endeavor  of  each  locality  to  keep  the  assessments 
down  as  low  as  possible,  in  order  to  escape  their  share  of 
general  taxation.     As  we  are  told,  "it  is  an  old  story,"  > 

Other  writers  tell  the  same  tale.     In  Zurich  the  declara- 
tions are  notoriously  inexact.     Nobody  is  astounded  nor  is 
any  one  scandalized   by  these   under-assessnicnts.     In  Ap- 
penzell  they  go  still  further.     It  has  become  good  form  (de 
bon  ton),  to   use  an  official   expression,  to   return  as  small 
a  fraction  of  one's  property  as  possible.     Not  only  does  the 
public  not  think  of  blaming  the  taxpayer  who  conceals  the 
greater  part  of  his  property,  but  people  are  actually  esteemed 
in  proportion  to  the  skill  with  which  they  can  evade  the  pay- 
ment of  the  tax.2     In  many  of  the  towns  regular  contracts 
are   entered   into   between   the   taxpayer   and  the  assessor, 
whereby  the  individual  agrees,  in  consideration  of  the  small 
assessment,  not  to  transfer  his  residence  to  some  other  town. 
In  only  two  of  the  towns  of  fair  size  are  conditions  at  all 
better.     One  of  these  is  Geneva,  with  a  population  of  145,000, 
where,  we  are  told  in  a  government  report,  almost  "one-half 
of  the  proceeds  of  the  tax   is  paid  by  a  little   more  than 
one  hundred  taxpayers,  who,  it  must  be  conceded,  have  al- 
ways acquitted  themselves  of  their  obligations  with  absolute 
correctness  and   loyalty.     It  is  not  there  that  the  evasions 
are  to  be  found;  they  must  be  sought  elsewhere." »     This, 
however,  is  due  to  the  fact  that  the  ta.xr  mobilitrc  is  very  low, 
amounting,  if  reduced  to  terms  of  income  at  four  per  cent  on 
the  capital,  to  a  tax  of  less  than  eight  per  cent  on  the  income. 
The  entire  proceeds,  moreover,  are  insignificant,  being  less 
than  one-quarter  of  a  million  dollars.     The  other  exception 
to  the  general  rule  is  Kaselstadt,  a  town  of   about  120,000 
inhabitants,  where  we  are  also  told  that  "  the  taxpayers,  at 
least  according  to  government  reports,  acquit  themselves  of 
their  fiscal  obligations  with  the  greatest  loyalty."*     But  in 
Basel,  also,  it  will  be  remembered  that  the  rate  is  exceedingly 

1 "  Es  i»t  allcs  schon  dargewesen."  —  ijteiger,  of  cit.,  p.  2j2. 

-Ccrcnvilk',  >'/■.  ,//.,  p.  139. 


8   /AV  / 


.  r-  '34- 


*//// 


!■.  .^o. 


The  Income  Tax  in  Other  Connlrics        361 


low,  runninf^  uj)  from  one  to  three  per  mill  on  the  property. 
This  is  a  very  different  situation    from    the   other  cantons, 
where   the   rates   become  "unreasonable  and  absurd"  (un 
sinnig)^  and  reach  the  figure  of  one  and  a  half  or  two  per 
cent  on  the  property. 

Careful  students  of  the  problem  have  therefore  been 
forced  to  the  conclusion  that  it  is  only  where  the  rates  are 
exceedingly  low  and  the  tax  itself  insignificant  that  it  meets 
with  any  measure  of  success,  and  that  in  proportion  as  the 
rates  are  raised  and  the  property  tax  jilays  a  more  imjwrtant 
r61e,  it  fails.  "  If  the  rate  is  moderate,"  we  are  told,  "the  tax 
is  paid  regularly ;  if  it  is  exaggerated,  frauds,  which  are 
more  or  less  avowed,  are  employed  in  order  to  reduce  the  tax 
rate  to  a  reasonable  sum."  ^  In  the  larger  towns  the  situation 
is  like  that  of  which  we  are  told  in  St.  Gallen  and  Rorschach, 
where  official  documents  inform  us  that  "so  far  as  concerns 
our  deplorable  tax  situation,  we  must  at  the  very  outset  reckon 
with  the  presumption  of  a  more  or  less  considerable  system 
of  fraud.  Kvery  taxpayer  who  is  even  half-way  honest  is 
the  victim  of  a  hundred  others  who  snap  their  fingers  at  the 
law  and  who,  in  doing  so,  are  to  a  very  great  extent  not  inter- 
fered with  in  the  least  by  the  officials."  ^  All  this  has  a  fa- 
miliar sound  to  us  in  the  United  States.  It  shows  that  where 
conditions  are  similar  the  results  must  be  the  same.  The  gen- 
eral property  tax  accordingly  is  almost  as  much  of  a  failure  in 
Switzerland  as  in  the  United  States,  and  .succeeds  fairly  well 

'  Cf.    Stci-rr.  ,/.  at.,  p.  7J. 

-  Cercnvilk',  n^''.  i//.,  pp.  134-1 55,  where  he  suids  up  his  investigations  nf  each 
of  the  separate  cantons.  The  .same  LuncUision  is  rcaclieil  by  I'nfessor  IJulluck  in 
his  adilress  on  "The  (jeneral  I'ruperty  Tax  m>'\'i\\.:M\\d.nA"  Kn  Stale  and  Local 
Taxation,  Foii'lh  lutcinational  Coiifir.iue  under  the  .luspita  of  the  Inter- 
national  Ta.x  i'on/'er,  ii,e.  Ci'lunil)U<,  H/II.  .\->  F-slen,  of.  cit.,  ]>.  Ji),  points 
out,  however,  a  mere  re<luctinn  of  the  rate  will  in  itself  not  help,  unless  there  is 
a  (leci'leil  chanjje  in  ailministrative  methods. 

•*  "  .\n^esi^  hts  unserer  Steuerniisere  ist  /um  vornherein  mit  iler  Prasumption 
einer  mehr  oiler  vi-eniger  erhrblichen  Stcuerhinter/iehunK  ^u  reehiun.  .  .  .  Jeder 
auch  nur  halhwegs  ehrlich  Versteuernde  ist  eben  bti  uns  das  ( ipfer  von  hundert 
andern,  die  drill  deset/  eine  \ase  dnhen  und  darin  vielfach  von  den  Steuerbe- 
ho-..ien  nil  in  j^>  sioil  wevim.    — --leij^cr,  of.  cit.,  p.  1 17. 


;i 


i  ii 


362 


Tlu  Income  Tax 


only  in  agricultural  districts,  and  in  places  where  the  tax 
is  so  insignificant  that  it  plays  but  a  slight  role  in  the  budget. 
The  experience  with  the  income  tax  is  not  a  whit  more 
favorable  than  with  the  general  property  tax.     The  methods 
of  assessment  arc  practically  the  same,  and  we  have  all  de- 
grees of  variation,  from  complete  local  autonomy  in  assess- 
ment to  more  or   less  centralized  control   by  the  cantonal 
authf   .ties.     Although  the  rate  of  the  income  tax  in  general 
is,  as  we  have  seen,  lower  than  that  of  the  property  tax,  the 
results  are  about  the  same,  because  the  assessment  is  imposed 
upon  the  same  individuals.     Those  who  escape  or  avoid  the 
property  tax  do  not  pay  the  income  tax.     Moreover,  the  diffi- 
culties in  the  assessment  of  income  are  greater  than  those  in 
the  assessment   ^f  property,  because  some  property,  at  all 
events,  is  visible  and  tangible,  while  income  cannot  be  put 
into  that  category.     If  any  comparison  is  to  be  drawn  be- 
tween the  income  and  the  property  ta.xes  in  Switzerland,  it  is 
in  favor  of  the  property  tax.     In  the  one  important  canton, 
Bern,  where,  as  we  have  learned,  the  income  tax  is  of  a  more 
general  character,  and  where  it  is  levied  on  all  incomes  ex- 
cept that  from  real  estate,  it  has  been  proved  by  experience 
that  the  income  tax  works  less  well  than  the  analogous  prop- 
erty tax  in  other  cantons.     We  are  told  that  the  frauds  are 
far  more  numerous  in  Bern,  where  the  personal  tax  is  levied 
on  incomes,  than  in  the  other  cantons,  where  the  tax  is  levied 
on  property;  and  this  is  true  even  of  those  cantons  where  the 
property  tax  is  not  checked  up  by  the  system  of  inventory 
after  death. ^     Moreover,  it  is  conceded  that  on  general  prin- 
ciples the  income  tax  in  Switzerland  is  inferior  to  the  property 
tax.     Yox  the  business  man  it  makes  very  little  difference 
whether  the  tax  is  assessed  on  income  or  on  capital.     F"or 
the  workman  who  spends  his  money  daily,  without  keeping 

i"D'aprt'S  les  experiences  faites  dans  le  canton  de  Rerne  qui,  seul  de  son 
esptce,  preleve  un  iinput  exclusif  sur  le  revenu  des  capitaux  niohillers,  les  fraudes 
paraiisent  y  ctro  l)eaucoup  plus  numbreuses  (|ue  dans  ks  cantons  se  ralliant  a 
rimput  sut  le  capital,  meme  dans  ceux  iiui  de  ne  connaissent  pas  I'inventairc  au 
decis."  —  (  ercnvdlo.  ot'.  -.it.,  p.  loo. 


The  Income   Tax  in  Other  Countries         363 

accounts,  the  calculation  of  income  is  considerably  more  diflfi- 
cult  than  that  of  capital,  if  he  has  any.  For  the  peasant, 
a  large  part  of  whose  income  is  derived  from  the  produce  of 
the  land  which  he  and  his  family  consume,  a  satisfactory 
estimate  of  income  becomes  impossible.  In  the  canton  of 
Vaud,  for  instance,  it  was  pointed  out  that  the  introduction 
of  an  income  tax  would  result  in  the  whole  agricultural  popu- 
lation paying  not  a  single  cent.  It  is  for  this  and  similar 
reasons  that  the  students  of  Swiss  taxation  consider  it  absurd 
to  hope  for  an  escape  from  the  evils  of  the  cantonal  general 
property  tax  through  the  substitution  of  a  cantonal  general 
income  tax.  If  the  property  tax  works  badly,  the  income 
tax  works  still  more  badly.^ 

The  Swiss  experiences  are  especially  instructive  because 
of  the  political  analogies  with  the  United  States.  Everything 
in  the  way  of  the  patching  up  of  the  general  property  tax 
that  well-intentioned  but  misdirected  zeal  has  attempted  in 
the  United  States,  has  been  tried  in  Switzerland  and  with 
similar  lack  of  success.  Not  only  has  the  general  property 
tax  broken  down  as  the  chief  source  of  revenue,  especially  in 
the  industrial  centres,  but  the  income  tax,  where  it  exists,  is 
even  more  unsuccessful  than  the  property  tax.  If  any  one 
lesson  is  to  be  learned  from  Swiss  experience,  it  is  that  a  sys- 
tem of  state  income  taxes,  resting,  as  do  the  general  property 
taxes,  upon  methods  of  local  assessment,  even  when  modified 
by  a  central  state  control,  is  bound  to  fail.  It  is  a  conclusive 
proof  of  the  fact  that  the  way  out  of  American  difficulties  is 
not  to  be  sought  in  the  direction  of  any  kind  of  local  or  state 
income  tax. 

1  Cerenville,  op.  at.,  pp.  93-103  ;   </.  Esslen,  op.  cit.,  p.  38. 


I  a 


,.        .H>B.'^|#- 


PART   II 


I 


THE    INCOME    TAX    AT   HOME 


CHAPTER   I 


The  Income  Tax  t.v  the  American  Colonies 


In  taking  up  the  discussion  of  the  income  tax  in  the 
United  States,  it  is  doubly  important  to  treat  ii  from  the 
historical  point  of  view.  For  in  the  first  place,  not  only  is  it 
true  that  one  generation  is  prone  easily  to  forget  the  ex- 
periences of  its  predecessor,  but  in  the  second  place  the  cor- 
rect  interpretation  of  certain  important  clauses  in  the  Ameri- 
can constitution  which  have  a  vital  bearing  upon  our  topic 
depends  in  very  large  measure  upon  the  historical  setting, 
and  ufxMi  the  mental  attitude  of  the  fathers  of  the  cons' itution 
to  the  actual  conditions  of  the  time.  It  is  for  both  of  these 
reasons  that  a  discussion  of  colonial  conditions  becomes  more 
than  ordinarily  important.  Our  endeavor  in  this  initial  chap- 
ter will  be  to  comi)are  the  colonial  taxes  with  their  analogues 
past  and  present  in  the  American  commonwealths,  and  to 
attempt  to  ascertain  how  far  these  colonial  imposts  deserve 
the  name  of  income  tax.' 


§  I.   The  Beginnings 

The  first  general  tax  law  in  the  American  colonies,  with  the 
exception  of  the  early  poll  tax  in  Virginia,^  was  the  law  of  1634 

•  This  chapter  was  publishod  liftecn  years  ago  in  the  Political Scienct  Quarterly, 
vol  X,  no.  2  (June,  1895).  It  was  originally  written,  with  the  exception  ..fa  few  para- 
graphs, in  1893,  anil  was  intemled  to  forma  part  of  a  general  work  on  the  income 
tax,  the  appearance  of  which  has  licen  delayed  until  now.  At  the  reijuest  of  Mr. 
I  larence  \.  Seward,  one  of  the  counsel  in  the  income-tax  cases  of  1895,  a  portion 
of  this  essay  »a>i  submitted  t>  him  in  manuscript  form,  and  was  utilised  in  the 
preparation  of  the  monograph  presented  by  him  in  the  original  hearing  as  a 
supplementary  brief.  The  majority  of  the  ijuotations  in  that  monograph  are 
taken  from  the  manuscript  essay. 

■^  For  the  early  Virginian  legislation,  see  Ripley, /"/hjhcju/  History  of  I'irf^iiiia, 
pp.  17-24  (Columbia  University  StuJir's  in  II.  lory,  Eivnomiis  ami  l'ul<tio  l.a~j), 
\o!.  1^,  iii'.  i;. 

1^1 


368 


Tlie  Income  Tax 


in  Massachusetts  Bay.'  This  provided  for  the  assessment  of 
each  man  "  according  to  his  estate  and  with  consideration  of 
all  other  his  ability es  whatsoever."  It  is  probable  that  the 
measure  of  this  ability  was  to  be  found  in  property  ;  for, 
although  the  law  itself  does  not  further  explain  the  term,  the 
matter  is  elucidated  in  a  provision  of  the  next  year,  that  "  all 
men  shall  be  rated  for  the'r  whole  abilitie,  wheresoever  it 
lies."'  This  seems  to  imply  only  visible  property;  for  such 
property  alone  is  susceptible  of  a  situs. 

It  was  not  until  seven  years  later  that  "  ability  "  was  defined 
to  include  something  more  than  mere  property.  This,  how- 
ever, occurred  not  in  Massachusetts  Bay,  but  in  the  colony  of 
New  Plymouth.  In  1643  assessors  were  appointed  to  rate 
all  the  inhabitants  of  that  colony  "  according  to  their  estates  or 
faculties,  that  is,  according  to  goods  lands  improoued  faculties 
and  I'sonall  abillities."  ^  This  law  is  noteworthy  for  a  double 
reason.  It  is  the  first  to  use  the  term  "faculty,"  and  it  dis- 
tinguishes faculty  and  personal  ability  from  visible  property. 
But  although  it  provides  for  a  faculty  tax,  it  does  not  tell  us 
exactly  how  to  measure  this  faculty.  This  was  reserved  for 
the  more  comprehensive  law  enacted  three  years  later  by  the 
Court  of  Assistants  of  the  Massachusetts  Bay  Company. 
The  court  order  of  1646  provides  not  only  for  the  assessment 
of  person?  I  and  real  estates,  but  distinctly  mentions  '•  laborers, 
artificers  and  handicraftsmen  "  as  subject  to  taxation,  and 
then  goes  on  to  say  :  "  And  for  all  such  persons  as  by  advan- 
tage of  their  arts  and  traces  are  more  enabled  to  help  bear 
the  public  charges  than  the  common  laborers  and  workmen, 
as  butchers,  bakers,  brewers,  victuallers,  smiths,  carpenters, 
taylors,  .-hoemakers,  joyners,  barbers,  millers  and  masons, 
with  all  other  manual  persons  and  artists,  such  are  to  be 
rated  for  returns  and  gains,  proportionable  unto  other  men  for 
the  produce  of  their  estate:."* 

'  Colonial  kecords  of  Afassachmells  Buy  (ShurtlefTs  e<l.,  1853),  i,  p.  ijo. 
■■^  IbiJ.,  |).  166. 

*  Keror.h  of  tht  Colony  of  Ne-M  I'lymoutk  :  Laws   1623-1682   (Pulsilur's  ed.), 
xi,  p.  42. 

*  Colonial  kecorus  of  Ma:,^.iJu'etli  Hay,  ii,  p.  1 7  j.     Cf.  ii,  p.  2I3,  anJ  iii,  p.  88. 


<Mgf     t  MtfTlh^WT^lTV  1^<i-     — ~' 


The  Income   Tax  in  the  American   Colonics     369 

Here  for  the  first  time  we  have  the  definition  of  faculty  or 
ability.  Just  as  the  faculty  of  the  property  owner  is  seen  in  the 
produce  of  his  estate,  so  that  of  "artists"  and  "tradesmen  " 
is  to  be  found  in  their  "returns  and  gains."  Of  course, 
since  the  property  value  of  an  estate  is  approximately  equal 
to  the  capitalized  value  of  the  annual  produce,  the  faculty  of 
the  property  owner  can  be  measured  by  the  value  of  the 
property,  that  is,  by  the  value  of  his  "  estate  "  ;  but  when 
there  is  no  property,  the  assessors  are  compelled  to  fall  back 
on  the  "returns  and  gains." 

The  principle  thus  laid  down  in  the  records  of  Massachu- 
setts Bay  was  soon  adopted  by  other  colonies.  The  colony 
of  New  Haven,  for  instance,  at  first  levied  a  land  tax.  As 
early  as  1640,  however,  personal  property  was  assessed,  by 
the  provision  that  a  new  rate  should  be  "estreeted,  halfe 
upon  estates,  halfe  upon  lands."  '  In  1645  it  was  seen  that 
even  this  was  not  adequate,  and  a  proposal  was  made  to  tax 
others  besides  property  owners ;  but  no  decision  was  reached 
at  that  time.*  As  the  dissatisfaction  grew,  a  committee  was 
appointed  in  1648  to  inquire  into  the  feasibility  of  the  Massa- 
chusetts system  of  taxing  all  property  in  general,  and  also  of 
levying  a  tax  on  the  profits  of  those  who  posse.ssed  no  proji 
erty.^  The  committee  reported  that  they  were  in  doubt  as 
to  the  advisability  of  taxing  houses  and  personal  property, 


1  Records  of  the  Colony  nnd  Plantation  of  Xe'M  Haven,  i,  p.  40. 

'Tlie  court  eotiaiilered  "  how  heavy  the  pul)h(iue  chardges  grew,  that  most  of 
them  have  bin  expended  fur  tlie  pulihipic  safty  and  aliout  things  of  cummon  public 
vse, .wherein  all  that  live  in  the  plantation  have  alike  benelit  in  their  proportions 
aiul  yet  many  live  in  the  plantation  ami  have  mann\  ;irivele(lyes  in  it  have  hitherto 
borne  noe  part  of  these  publickque  chard^es,  whtrevppon  it  was  debated  whether 
or  noe  in  ef|uety  such  should  not  lie  rated  some  way  or  other  for  time  to  come,  so 
as  those  that  have  borne  tlie  whole  burden  hitherto  may  be  eased  ;  but  because  it 
was  not  ripe  for  an  issue,  the  court  referred  to  ...  a  committee."  —  Ibid.,  p.  181. 

'  Lieutenant  Secly  propounded  that  the  court  would  "  consider  of  some  other  waye 
of  rateing  .nen  than  is  settled  by  lands  for  divers  men  w'h  had  good  estates  at 
first  anil  land  answerable,  whose  estates  are  sunke  and  they  not  able  to  pave  as 
they  did,  an  1  divers  ''sons  whoc  had  land  fir  their  heads,  whose  estates  are 
snialle,  yett  paye  great  rates,  and  others  whose  estates  are  increased,  haveing  but 
little  land,  paye  but  a  small  matter  to  publiijue  cliarges,"  etc.,  etc.  —  Ihid.,  p.  448. 


370 


The  Income  Tax 


but  that  "  for  tradesmen  they  thlnke  something  should  be 
done  that  may  be  equall  in  waye  of  rateing  them  for  their 
trades."  As  a  result  the  law  of  1649  was  enacted,  which 
introduced  the  taxation  of  profits  of  laborers,  tradespeople, 
and  others.' 

In  Connecticut  the  early  laws  were  patterned  on  the  Massa- 
chusetts Bay  legislation.  It  was  provided  in  1650  that  "  every 
inhabitant  who  doth  not  voluntarily  contribute  proportionably 
to  his  abillity  to  all  common  charges  shall  be  compelled  there- 
unto by  assessments  and  distress  " ;  and  it  was  further  pro- 
vided that  the  lands  and  estates  should  be  rated  "  where  the 
lands  &  estates  shall  lye,"  but  "  theire  persons  where  they 
dwell."  *  Then  follow  detailed  instructions  how  to  assess 
various  kinds  of  property.  The  final  clauses  in  these  instruc- 
tions provide  for  the  faculty  tax  on  all  "  manuall  persons  and 
artists,"  etc.,  following  word  for  word  the  Massachusetts  Bay 
law  of  1646,  as  quoted  above.  These  provisions  are  fre- 
quently repeated  in  the  laws  of  the  seventeenth  century. 

In  Plymouth  Colony  the  practice  inaugurated  by  the  law  of 
1643  continued,  although  we  find  only  two  more  instances 
where  it  is  expressly  mentioned,  namely,  in  1665,  when 
"  visible  estates  and  faculties  "  are  spoken  of,^  and  in 
1689,  when  a  court  order  fixed  the  valuation  for  different 
kinds  of  visible  estate,  but  left  the  valuation  of  "  faculties 
and  personall  abillities  "  to  be  determined  "  at  will  and 
doomc."* 

In  Rhode  Island  the  faculty  tax  was  introduced  a  little 
later.     In  1673  the  Assembly  laid  down  the  rule  that  taxes 


'  The  reason  given  was  :  "  Seeing  that  lalxmrers  anil  handycrafe  trades  & 
seamen  are  of  divers  sorts  iS:  conditions,  some  live  more  comfor*  ibly,  some  less, 
some  follow  ther  trades  more  and  some  less,  ther  time  being  taken  vp  more  aboute 
husbandry  Wh  payes  anotht  .vay,  that  therefor  a  due  lonsideraiion  be  had,  and 
every  man  justly  rated  as  neere  as  the  comittee  can  judge,  and  that  other  men 
whoe  trade  in  way  of  merchandizing  bee  duely  rated  accunling  to  their  trades  and 
stockes  they  improve,  as  neere  as  they  can  judge.' —  li>ui.,  i,  p.  41)4. 

'^  Cohmiitl  h'eioiils  of  Coiinftliiiit,  i,  p.  54S. 

'  J\eror,h  of  the  Colony  of  Xcm  I'lymoulii  (I'ulsifer's  ed.l,  xi,  p.  .1 1  ;  Shurtleff's 
ed.,  iv,  p.  102.  *,JliiJ.,  p.  221. 


The  Income   Tax  in  the  American  Colonics     371 

ought  to  be  assessed  according  to  "  equety  in  estate  and 
strength,"  i.e.,  not  only  according  to  the  property,  but  also  in 
proportion  to  what  was  elsewhere  called  the  "  faculty,"  or 
"  profits  and  gains."  '  In  Rhode  Island  we  find,  moreover, 
the  curious  survival  of  the  niedineval  practice  that  every  man 
should  assess  his  neighbor  as  well  as  himself.^  Later  on 
"  three  able  and  honest  men  "  were  chosen  in  each  town  to 
"take  the  view  of  each  of  their  inhabitants,"  and  as  to  "  the 
merchants  and  tradesmen  to  make  this  part  of  the  rate  ac- 
cording to  the  yearly  profit."  ^ 

Outside  of  New  England  this  early  ta.xation  of  profits  by 
the  side  of  the  general  property  ta.\  is  found  also  in  Now 
Jersey,  where  it  was  provided  by  the  law  of  1684  that  not 
only  property  owners,  but  also  "all  other  persons  within  this 
province  who  are  free  men  and  are  artificers  or  follow  any 
trade  or  merchandizing,  and  also  all  innholders,  ordinary 
keepers  and  other  persons  in  places  of  profit  within  this 
province,  shall  be  lyable  to  be  assessed  for  the  same  accord- 
ing to  the  discretion  of  the  assessors."  * 

This  completes  the  list  of  examples  of  the  faculty  tax  dur- 
ing the  seventeenth  century.  Subsequently,  as  we  shall  see, 
the  tax  appeared  in  some  of  the  Southern  colonics.  In  New 
York  it  never  secured  a  foothold.  During  the  Dutch  domina- 
tion the  tax  system  of  this  iatter  colony  was  composed  almost 
entirely  of  excises  and  duties ;  when  the  English  obtained 
control,  the  general  property  tax  was  introduced,  but  with- 

'  '•  This  assembly,  taking  into  consideration  the  great  dissatisfaction  and  irregu- 
larity that  hath  been  by  makcinge  rates  or  raisinge  a  common  stock  for  public 
charges  in  this  Collony  in  general  or  for  any  perticular  towne,  and  the  great  faile- 
ablcness  to  accomplish  it  and  great  delaies  in  performance,  wh.it  was  ilone,  ami 
the  necessity  there  is  for  publick  charge  to  be  borne,  and  the  justice  it  should  be 
done  according  to  equety  in  estate  and  strength,"  cA.,  etc.  —  Cjloniat  Kciords  of 
Rhoile  fsliDui,  ii.  ]>.  510. 

-  The  inclividcal  shall  be  required  to  "give  in  writcinge  what  jiroportion  of 
estate  and  strength  in  pertickelar  he  guesseth  tenn  of  his  neighbours,  nameinge 
them  in  ;-ertickular,  hath  in  estate  and  strength  to  his  estate  and  strength."  — 
Ihiii.,  ii,  p.  512. 

■'  Iliid.,  iii,  p.  300  I  l()95). 

■*  l.itxvi  of  .\',-\'  J:'r!fy,  1664-1701  (Learning  and  Spicer),  p.  4<i4. 


2,7^ 


The  Jncome  Tax 


out  any  additional  "  faculty "  tax  as  in  the   New  England 
colonies.* 


§  2.  The  Development  in  Ncu<  Eughvul 
During  the  eighteenth  century  the  custom  of  assessing 
profits  continued  and  extended  to  other  colonies.  In  .  lassa- 
chusetts  more  earnest  and  repeated  efforts  to  ex])lain  and  to 
enforce  the  law  were  made  than  anywhere  else.  This  will  be 
our  excuse  for  tracing  the  legislation  in  more  detail. 

Upon  the  union  of  the  Plymouth  and  Massachusetts  liay 
colonies  into  the  Province  of  Massachusetts,  under  the  charter 
of  1692,  a  law  was  immediately  enacted  providing  that  all 
estates  whatsoever,  real  and  personal,  should  be  taxed  at  "  a 
quarter  part  of  one  year's  value  or  income  thereof."     But 
this  was  not  very  clear.     Nor  was  the  doubt  removed  by 
another  law  of  the  same  year,  to  the  effect  that  "every  handi- 
craftsman "  be  valued  "  for  his  income."  2     In  1697,  however, 
we  find  the  old  terms  used  as  of  general  application.     The 
assessors  are  now  again  cautioned  to  rate  the  taxpayers,  "  hav- 
ing due  regard  to  persons'  faculties  and  personal  abilities." 
In  1698  the  clause  "  not  excluding  faculties  "  is  inserted.    And 
in  the  following  year  the  assessors  are  instructed  to  tax  "  in- 
comes by  any  trade  or  faculty  which  anv  persons  do  or  shall 
exercise."  3     A  few  years  later  fuller  instructions  are  given. 
Thus  in  1706  the  assessors  are  admonished  to  rate  "income 
by  any  trade  or  facJty,  which  any  person  or  persons  (except 

»  Ely,  in  his  7\,x,,tion  ,„  Ameruan  States  and  Cities  (\ew  York,  n.  d.  fiSSSl ) 
p.  no,  says  that  "the  estimated  incomes  of  certain  classes  were  taxed  "  The 
context  «  not  clear,  but  Professor  Kly  coul.l  only  have  n>eant  that  this  was  the 
case  m  New  Englan.l,  v  '  -e  tax  system  is  des-rilxd  in  the  \ew  Xethcrland  doc- 
ument to  whtch  alius  .  de.  Vet  this  passage  was  quoted  in  the  brief  sub- 
mitted by  Mr.  Sevvar .  Supreme  Court  as  sho»,nK  that  the  system  «as  to  he 

found  ,n  New  Ne.herland.  This  is  a  complete  mistake.  No  such  system  ever 
existed  m  New  Netherland.  Mr.  Seward's  mistake  is  not  wholly  inexcusable,  he- 
cause  it  IS  not  easy  to  ascertain  from  Dr.  Elys  text  whether  he  i,  referring  to 
New  Fnijlan,!  or  to  New  Xethcrland. 

^A.n  „«,/  Kesolves  cf  the  I'rovnu  ,/  Mass.uku.ctn  Ilu;  ,6^2  to  ,780 
(5  vols.),  I,  pp.  29.  92.  ' 

^  Ibid.,  i,  pp.  302,  413. 


The  Income   Tax  in  the  American  Colonies     373 


as  before  excepted)  do  or  shall  exercise  in  gaining  by  money, 
or  other  estate  not  particularly  otherwise  assest,  or  commis- 
sions of  profit  in  their  improvement,  according  to  their  under- 
standing and  cunning,  at  one  penny  on  the  pound,  and  to 
abate  or  multiply  the  same,  if  need  be,  so  as  to  make  up  the 
sum  hereby  set  and  ordered  for  such  town  or  district  to 
pay."  '  The  law  of  1 738  adds  the  words  "  business  or  employ, 
ment,"  commanding  the  assessment  of  "  the  income  or  profit 
which  any  person  or  persons  (except  as  before  excepted)  do 
or  shall  receive  from  any  trade,  faculty,  business  or  employ- 
ment whatsoever,  and  all  profits  which  may  or  shall  arise  by 
money  or  other  estate  not  particularly  othe-wise  assessed,  or 
commissions  of  profit  in  their  improvement.  .  .  .  "^ 

K.>:cept  as  to  the  rates,  this  form  of  law  continued  un- 
changed tiU  1777.  The  law  enacted  in  this  year  gives  a 
fuller  interpretation  of  income  than  any  hitherto.  Taxpayers 
arc  assessed  "on  the  amount  of  their  income  from  any  pro- 
fession, faculty,  handicraft,  trade,  or  employment ;  and  also 
on  the  amount  of  all  incomes  and  profits  gained  by  trading 
by  sea  and  on  shore,  and  by  means  of  advantages  arising 
from  the  war  and  the  necessities  of  the  community."  '^  Again, 
the  law  of  1779  provides  that,  "in  considering  the  incomes 
and  profits  last  mentioned,  the  assessors  are  to  have  special 
regard  to  the  way  and  manner  in  which  the  same  have  been 
made,  as  well  as  the  quantum  thereof,  and  to  assess  them  at 
such  rate,  as  they  on  their  oaths  shall  judge  to  be  just  and 
reasonable;  provided,  they  do  not  in  any  case  assess  such 
incomes  and  profits  at  more  than  five  times  "  [increased  in 
the  next  year  to  "  ton  times  "J  "  the  sum  of  the  same  amount 
in  other  kind  of  estate."  *  In  1 780  a  constitution  was  adopted 
which  commanded,  among  other  things,  that  the  public  charges 
of  government  should  be  assessed  '  on  polls  and  estates  in  the 
manner  that  has  hitherto  been  practised."  The  same  methods, 
therefore,  continued  to  the  end  of  the  century. 


5'-'-- 


iiiiJ  Keiohii   of  Ihe  Frovtme  of  Minsmhusetti    Bay,    ibgs   /o    ijSo, 

''  //'I,/.,  ii,  p.  934. 


374 


The  Income  Tax 


In  none  of  the  other  colonies  do  we  find  so  full  or  so  fre- 
quent indications  of  the  legislative  intent  as  in  Massachusetts. 
Occasional  references,  however,  are  found  to  the  practice  of 
assessing  income.  And  although  it  is  probable  that  the  cus- 
tom was  gradually  dying  out,  the  storm  and  stress  of  the 
Revolutionary  period  again  brought  it  to  the  front  in  several 
places. 

Ir  Connecticut  we  have  seen  that  the  early  laws  followed 
almost  word  for  word  the  Massachusetts  legislation.  Later 
acts  provided  that  "  all  such  persons  who  by  their  acts  and 
trades  are  advantaged  shall  be  rated  in  the  list  .  .  .  propor- 
tionable to  their  gains  and  returns,  —  butchers,  bakers  .  .  . 
and  all  other  artists  and  tradesmen  and  shopkeepers."  >  As 
the  asses.sors  might  find  it  diflficult  to  rate  them  justly,  the 
law  sometimes  gave  more  e.xplicit  directions  as  to  fi.xing  the 
income.  Thus  the  following  was  enacted  in  1725  :  "  For  the 
future  every  one  of  the  allowed  attorneys  at  the  law  shall  be 
set  in  the  innual  list  for  their  faculty,  i.e.,  those  that  be  the 
least  practitioners  fifty  pounds,  and  the  others  in  proportion 
to  their  practice."  2  It  may  be  doubted  whether  even  this 
settled  the  matter  definitely. 

Later  enactments  prove,  however,  that  instead  of  directly 
estimating  the  profits  of  the  taxpayers  liable  to  the  tax,  the 
assessors  used  different  criteria  to  compute  the  amount.  For 
instance,  it  had  several  times  been  provided  that  "  all  traders, 
tradesmen  and  artificers  shall  be  rated  in  the  list  proportion- 
able to  their  gains  and  returns."  But  as  there  seems  to  have 
been  no  uniformity  in  the  methods  employed,  the  following 
important  act    v-'s  passed  in  1771  :  — 

"  All  traders  or  shopkeepers  in  this  Colony  shall  be  rated 
in  the  list  after  the  rate  of  ten  per  cent  on  the  prime  cost  of 
all  goods,  wares,  and  merchandizes  which  they  purchase  for 
sale  by  retail  (excci)t  the  produce  and  manufactures  of  this 
Colony).     And  all  traders  by  wholesale,  tradesmen,  artificers, 

'^Acts  and  lavs  of  CoiintctUitt.     New  London,  1715,  |i.  100. 
'  Colonial!  A'cuorJs  of  Connei-ticut,  tyiy-iy^^,  vi,  p.  525. 
"  //'/</.,  17M-17JJ.  xiii.  p.  513. 


The  Income  Tax  in  the  American  Colonies     375 

tavern-keepers,  and  others  by  law  rateable  on  account  of 
their  faculty  or  business,  shall  be  rated  in  the  list  to  the 
amount  of  their  annual  gains,  incomes  or  clear  profits  by 
means  of  their  business,  according  to  the  best  estimate  that 
can  be  made  thereof  by  the  listers,  who  shall  assess  such 
traders,  tradesmen,  Sc.  by  their  best  discretion,  agreeable  to 
the  rules  aforesaid.  But  when  it  appears  that  any  persons 
have  been  unsuccessful  or  sustained  considerable  losses  in 
their  trade,  in  such  cases  the  listers  may  make  proper  abate- 
ment for  the  same.  And  if  any  person  shall  be  assessed  by 
the  listers  for  any  of  the  matters  aforesaid  more  than  at  the 
rates  aforesaid,  upon  proof  thereof,  by  oath  or  othervise,  to 
the  satisfaction  of  the  listers,  or  authority  and  selectmen, 
who  have  right  by  law  to  grant  relief,  such  overcharge  may 
be  abated." 

The  faculty  tax  continued  in  Connecticut  to  the  close  of 
the  century  substantially  unchanged,  with  the  exception  that 
ordinary  artisans  were  subsequently  exempted.  Secretary 
Wolcott,  in  his  famous  report  on  direct  taxes  in  1796,  de- 
scribed the  tax  system  as  embracing  first,  a  tax  on  various 
kinds  of  property,  real  and  personal,  and  second,  "  assess- 
ments proportioned  to  the  estimated  gains  or  profits  arising 
from  any  and  all  lucrative  professions,  trades  and  occupa- 
tions, excepting  compensations  to  public  officers,  the  profits 
of  husbandry  and  common  labor  for  hire."  This  second 
element  was  included  in  the  annual  lists  of  taxable  property 
as  "  assessments  on  lawyers,  shopkeepers,  surgeons,  physi- 
cians, merchants,"  etc.  * 

In  Rhode  Island,  where  the  faculty  tax  was  originally 
levied  as  in  the  neighboring  colonies,  it  seems  to  have  fallen 
into  disuse  somewhat  earlier.  In  1744  the  tax  law  still  pro- 
vides "  that  the  assessors  in  all  and  every  rate  shall  consider 
all  persons  who  make  profit  by  their  faculties,  and  shall  rate 
them  accordingly."'^     This  is  the  last  direct  mention  of  the 

'  American  Stale  Papen.  /'iimme,  i,  pp.  423,  454. 

'  .h/s  and  Laws  of  His  Majesty's  Colony  of  KhoJe  Island  and  Providence 
Plantations.     Newport,  1745,  p.  295. 


376 


The  Income  Tax 


faculty  tax.  In  1754  and  1755  the  only  taxes  named  are 
those  on  "  estates  and  polls.' »  This  expression  might  pos- 
sibly still  be  considered  to  include  faculties.  Hut  in  the 
revision  of  1766,  which  served  as  a  basis  of  valuation  during 
the  remainder  of  the  century,  we  search  in  vain  for  any 
mention  of  the  faculty  tax.*  And  when  VVolcott  drew  up  his 
report  in  1796,  he  described  the  system  of  taxation  simply  as 
one  "on  polls  and  the  collective  ma.ss  of  property."^  It 
may  safely  be  said,  therefore,  that  the  faculty  tax  had  dis- 
appeared in  Rhode  Island  by  the  middle  of  the  century. 

In  New  Hampshire  the  faculty  tax  came  into  use  some- 
what later.  The  first  detailed  assessment  law  passed  in  the 
province,  in  1719,  instructed  the  selectmen  to  assess  the 
residents  "in  just  and  equal  proportion,  each  particular  per- 
son according  to  his  known  ability  and  estate."  Later  on, 
in  1739,  "an  act  for  the  more  easy  and  speedy  assessing" 
of  ta.xes  was  passed,  which  authorized  the  selectmen  to  assess 
"  the  poles  and  estates  of  the  inhabitants,  each  one  according 
to  his  known  ability."*  In  1772  greater  definitcness  was 
attained  by  the  provision  that  a  person's  "  faculty  "  should 
be  estimated  at  the  discretion  of  the  assessor,  although  not 
at  a  sum  over  twenty  pounds.''  Before  the  close  of  the 
century,  however,  the  tax  had  disappeared.  For  the  law  of 
1794.  which  fixed  all  the  details  of  the  state's  system,  while 
taxing  tradesmen,  storekeepers,  and  others,  assessed  them 
merely  on  their  stock  in  trade  as  a  part  of  their  personal 
property.^ 

In  New  York,  as  we  know,  there  never  was  any  faculty 

>  Records  of  the  Colony  of  Rhode  hhnd,  v,  pp.  309,  if^^.  A  curious  protest 
against  the  arbitrariness  in  the  assessment  of  the  general  taxes  is  tc  be  founJ  in 
1766.     /(«(,/.,  vi,  518  pp. 

"  Acts  and  Laws  of  the  Eugtish  Colonies  of  Rhode  Island  and  I'rozddence 
Plantiitions,  p.  219. 

»  American  State  Papers,  Finance,  i.  p.  422. 

^  Acts  and  Imws  of  His  A/aJesty's  Province  of  X,-u'  ffampsliin;  1761.  pp 
30,  180.  r  I      ,  n 

'  Law  of  January  2,  1772. 

^  Law  of  February  22.  1794;    Xrrv  flamtiskire  ! a-n  of  r-r.-y^    p   a-.-^ 


The  Income  Tax  in  the  American  Colonics     377 

tax.  But  Vermont,  when  it  split  off  from  New  York, 
followed  the  example  of  Connecticut  in  taxation  as  in  much 
other  legislation.  The  first  law  on  the  subject,  that  of  1778, 
is  very  explicit  in  its  provisions,  and  repeats  the  Connecticut 
law  in  some  places  word  for  word.*  The  part  of  interest  to 
us  is  as  follows  :  — 

"  He  it  further  enacted  by  the  authority  aforesaid,  that  all 
allowed  attorneys  at  law  in  this  commonwealth,  shall  be  set 
in  the  annual  list  for  their  faculty,  —  the  lea.st  practitioner 
fifty  pounds,  and  the  others  in  proportion  accordinj^  to  their 
l)ractice ;  to  be  assessed  at  the  discretion  of  the  listers  of  the 
respective  towns  where  said  attorneys  live  during  their  prac- 
tice as  such.  All  tradesmen,  traders,  artificers,  shall  be 
rated  in  the  lists  proportionable  to  their  gains  and  returns; 
in  like  manner,  all  warehouses,  shops,  workhouses  and  mills 
where  the  owners  have  particular  improvement  or  advantage 
thereof,  according  to  the  best  judgment  and  discretion  of  the 
listers."  In  1791  attorneys  also  were  assessed  "proportion- 
able to  their  gains  according  to  the  best  judgment  and  discre- 
tion of  the  listers."  2  And  in  1797  the  general  provision  was 
inserted  that  "  all  licensed  attorneys,  practitioners  of  physic  or 
surgery,  merchants,  traders,  owners  of  mills,  mechanics,  and 
all  other  persons  who  gain  their  livelihood  by  buying,  selling, 
or  exchanging,  or  by  other  traffic  not  in  the  regular  channel 
of  mercantile  life,"  be  listed  in  proportion  to  their  returns.'' 


§  3.    The  Middle  aud  Sotithent  Colonics 

Outside  of  New  England,  the  faculty  tax  was  to  be  found 
also  iti  Pennsylvania,  though  not  until  after  the  Revolution 
had  commenced.     In  1782  a  law  was  enacted  which  imposed 

'  An  Act  directing  Listers  in  their  Office  aivl  Duty.  Printed  in  I.ixws  of  \'er- 
mont,  lyjg  (295  uf  Slade's  Slate  Papers) .  N'o  copy  of  the  laws  of  1778  is  known 
to  be  in  existence.  The  hws  iif  that  year  were  emlimlierl  in  the  vuhiine  for  17-v. 
.See  Wood,  History  of  Taxation  in  V'rmiont,  pp.  32  and  36  (Columljia  University 
StuJiti  in  fliilory.  Economics,  and  Public  Law,  vol.  iv,  no.  3). 

^  /rtTcr  of  Vermont,  tygi,  p.  266. 

•^  t'oiiit>i/atii>n  of  Law '  of  1797.  p.  565.     See  Woo  I.  ot>.  cit.,  p.  39. 


378 


The  Income  Tax 


a  poll  tax  on  all  freemen.     But  the  law  went  on  to  say  that 
"  all  offices  and  posts  ot  profit,  trades,  occupations  and  profes- 
sions (that  of  ministers  of  the  gospel  of  all  denominations  and 
schoolmasters  only  excepted)  shall  be  rated  at  the  discretion 
of  the  township,  ward  or  district  assessors,  and  two  assistant 
freeholders  of  the  proper  township,  ward  or  district,  having 
due  regard  to   the   profits  arising  from  them."'      In    1785 
mechanics  and  manufactures  were  added  to  the  list  of  ex- 
empted classes.     The   discretion   which  this  act  left  to  the 
assessors  was  very  slight,  as  the  lower  and  higher  limits  of 
the  tax  were  definitely  fixed.     In  distinction  from  the  faculty 
tax  proper,  this  might  rather  be  termed  a  classified  poll  tax 
with   a   very  low  maximum.      For  instance,  freemen  of  no 
profession   or  calling  might  be  assessed  from  fifty  cents  to 
ten   dollars ;  mechanics   and   tradesmen,  thirty  cents  to  two 
dollars;  tavern-keepers,    shop-keepers,  and    other    retailers, 
fifty  cents  to  five  dollars;  brokers,   bankers,  merchant.s,  law- 
yers and  physicians,  one  to  ten  dollars ;  persons  of  professions 
or  occupations  not  before  described,  twenty-five  cents  to  eight 
dollars.      These    rates   applied  only   when   the  tax  on  real 
property   amounted   to   one   per  cent.      When  the  rate  fell 
below  this,  the  "  taxes  on  occupations  and  professions,"  as 
they  were  called,  were  to  be  proportionately  reduced.^ 

In  Delaware,  also,  we  find  the  faculty  tax.  The  law  of  1752, 
inaeed,  simply  provided  that  all  persons  should  be  assessed  on 
their  estates.  Hut  that  this  included  more  than  mere  visible 
property  is  apparent  from  the  section  which  states  that  single 
men  who  have  no  visible  estates  shall  be  assessed  at  not  less 
than  £\2  nor  more  than  ^"24,  and  that  in  all  cases  the  assess- 
ors shall  pay  "  due  regard  to  such  as  are  poor  and  have  a 
charge  of  children." «  When  Wolcott  described  the  system, 
he  spoke  of  it  as  ba.sed  on  the  assessment  of  profits.  But  in 
1 796,  when  a  new  law  was  passed,  provision  was  made  for 

'  La-.vs  cfthf  Commonwealth  of  renmylvania  (Dallas),  ii,  p.  8. 
'  Amerium  Slut,-  Papers,  Jiiuinee,  i,  p.  42S. 

^  /.au'S    0/  Hie  (.,\.:eriiment  0/  .Ve-.c-castle,  Kent  ami  Sussex  upon  Delaware, 
rhilaJclphia,  1752,  p.  2J4.  « 


The  Iiuome   Tax  in  the  Anurican  Colonies     ^79 

"  asccrtaiiiinj;  the  stock  of  merchants,  tradesmen,  mechanics 
and  manufacturers,  for  the  purpose  of  regulatiiij;  assessments 
ui)on  su:h  persons,  proportioned  to  their  gains  aiul  profits."  * 
In  other  words,  stock  in  trade  was  now  assessed  as  personal 
property. 

I'A'en  in  the  more  southern  states  the  faculty  tax  was  not 
unknown.  In  Maryland,  diirini;  the  colonial  period,  the  tax 
system  was  very  primitive  ;  as  its  historian  states,  taxes  were 
levied  "  by  even  and  equal  assessment,  without  reference  to 
ability  to  p.iy,  revenue  enjoyed  or  property  worth."  ^  But 
when  the  state  constitution  was  adopted  in  1777  and  the  poll 
tax  was  abolished,  not  only  was  a  property  tax  inaugurated, 
but  provision  was  made  for  the  faculty  tax  by  imposing  an 
assessment  of  one-quarter  of  one  per  cent  on  the  "amount 
received  yearly  "  by  "  every  person  having  any  public  office 
of  profit,  or  an  annuity  or  .stipend,"  and  on  the  "  clear  yearly 
profit"  of  "every  person  practising  law  or  physic,  every 
hired  clerk  acting  without  commission,  every  factor  -nt 
or  manager  trading  or  using  commerce  in  this  state.  In 

1779  the  tax  was  raised  to  two  anil  a  half  per  cent.*  Ii.  the 
next  year,  however,  the  whole  .system  was  abolished. 

In  South  Carolina  the  faculty  tax  began  earlier.  We  find 
that  in  1701  a  law  was  enacted  which  imposed  a  tax  on  the 
citizens  according  to  their  "estates,  stocks  and  abilities,  or 
the  profits  that  any  of  them  do  make  off  or  from  any  public 
office  or  employment."  And  two  years  later  it  was  provided 
that  individuals  should  be  assessed  on  their  "estates,  goods, 
merchandizes,  stocks,  abilities,  offices  and  places  of  profits  of 
whatever  kind  or  nature  soever."  This  system  continued 
throughout  the  century.  The  law  of  1777,  which  was  the 
first  under  the  state  constitution,  phrased  it  a  little  differently 
by  providing  for  a  tax  on  "  the  profits  of  all  faculties  and  pro- 


'  ,!»ifrii<}»  Slatf  Pipe's,  fitiunfe,  i,  ]\  429. 

-  "  i^ktlili  pf  Tax   I.tfjislati'iii   in   Maryland."     rrintnl  as  an  appcmlix  to  the 
Report  of  the  Miiryliinii  Tiix  Commission.      Italtiinurc,   iSSiJ,  p.  <  xxix, 
'  Maryland  fnivs  of  ijyy,  c.  22,  si;cs.  5,  6. 

*  /.,-.r  ...'-/-r.;    ,■     ::    s.  .■    .t.H. 


38o 


Tht  Income   Tax 


fcssiuns.  the  clergy  excepted,  factorajrc.  employments,  Imiuli 
crafts  uiui  trades  tliruiiKhout  thi.s  state."  •  Wolcott,  in  his 
report  of  i;<y>,  describes  the  sy.stcm  as  "  foumled  on  eon- 
jectural  estimates,  according  to  the  best  jiidt{ment  of  the 
collectors."  These  estimates  were  "  understood  to  he  very 
moderate."  In  Charleston,  for  instance,  they  were  graduated 
according  to  the  circumstances  of  individuals,  from  >ioo  to 

Finally,  it  may  be  said  that  in  Virginia  an  attempt  was 
made  in  1786  to  introduce  the  faculty  ta.x,  by  a.ssessiiig  at- 
torneys, merchants,  physicians,  surgeons,  and  apothecaries. 
But  the  experiment  la.sted  only  four  years.  In  1790  the 
whole  system  was  abolished.^ 

In  addition  to  these  cases  of  the  taxation  of  profits  as  such, 
there  were  many  cases  in  which,  while  the  tax  was  imposed 
on  property,  the  assessment  was  made  on  the  basis  of  prod- 
uct. That  is,  it  was  deemed  easier  to  ascertain  the  profits 
than  the  value  of  the  property  :  the  property  was  gauged  by 
the  revenue.  Thus  in  Massachusetts  in  1692  all  estates  real 
and  personal  were  to  be  rated  "  at  a  quarter  part  of  one  year's 
value  or  income  thereof."  To  make  this  clearer,  it  was  pro- 
vided in  the  following  year  that  "  all  houses,  warehouses,  tan- 
yard^,  orchards,  pastures,  meadows  and  lands,  mills,  cranes 
and  wharffs  be  estimated  at  seven  years'  income  as  they  are 
or  nuis  he  let  for ;  which  seven  years'  income  is  to  be  es- 
teemed and  reputed  the  value  of  c /aftman,  for  his  income." 
From  this  time  on  until  the  Revoiutionaiy  period  the  valua- 
tion of  real  estate  was  computed  on  the  income  derived  from 
it,  but  the  number  of  years  varied.  From  1698  to  1700  the 
valuation  was  one  year's  income,  but  during  most  of  the 
eighteenth  century  it  was  six  years'  income.* 

In  Rhode  Island  the  ratemakers  were  to  "  take  a  narrow 
inspection  of  the  lands  and  meadows  and  so  to  judge  of  the 

1  Coper,  St^ituUs  at  /ari^e  of  South  Carolina,  ii,  pp.  36,  183  ;   iv,  p.  366. 

•^  Amfrir,in  State  I'af'ers,  Finame,  i,  p.  435. 

'  Hcninfj's  St.itutes,  \\\,  p.  j.Sj  ;   xiii,  p.  114. 

*  .-/./o  ,;«,/  A,-!,  l:,s  of  the  I'ro-ince  of  Masuuhusetti  Bay.  i.  pp.  20,  92,  413. 


The  liuumc    Tax  in  the  American   Colonics     381 

yc;ir!y  profit  at  their  wisdom  and  discretion."  '  In  New 
Hamji^hire  the  a>se!«siirs  wcro  dircitcd  l)  take  the  estimated 
produce  of  the  land  as  a  basis;  while  hmmes,  mills,  wharves, 
and  ferries  were  valued  at  one-tenth  or  one-twelfth  of  their 
yearly  net  income,  after  deducting  repairs.'-"  In  New  York  it 
was  customary  to  a.sscss  land  accordin;,'  to  its  annual  yield, 
even  when  other  property  was  valued  at  a  fixed  sum.  We 
find  this  as  early  as  i'»93,  and  frequently  thereafter.''  Kven 
as  late  as  the  middle  of  the  eii^hteenth  century  the  New 
York  assessors  for  the  general  property  ta.x  took  an  oath  to 
estimate  the  property  by  the  product— a  pound  for  every 
shilling.*  In  Delaware,  even  after  l""/),  real  estate  was  still 
valued  according  to  the  rents  arising  therefrom.*  Finally,  in 
Virginia,  although  land  w;'s  generally  estimated  at  the  pre- 
sumed capital  vahi"  ho  yearly  rent  or  income  was  sometimes 
utilized,  especially  in  'e  towns,  as  a  basis  for  estimating  the 
value."  Toward  the  close  of  the  century  we  are  told  that  the 
usual  tax  on  ( itv  projierty  was  "  five-sjxths  of  one  [ler  cent  of 
the  ascertained  or  estimated  yearly  rent  or  income."  ' 


§  4.    Conclusion 

After  this  somewhat  tedious  review  of  the  facts,  let  u-  at- 
tempt to  ascertain  e.xactly  what  they  mean. 

At  the  very  outset  the  distinction  between  real  and  personal 
taxes  must  be  borne  in  mind.  A  real  tax  is  a  tax  on  things ; 
a  personal  tax  is  a  tax  on  persons.     A  land  tax,  for  instance, 

'  Cl.' «ij/  Ke.orli  of  BhoJi  liltiiJ,  iii,  p.  300. 

•  Acts  "f  January  2,  I772,  ar.  t  Ki;:>rjary  23,  170}.  I a-rt  of  Ikr  Slufe  of  Xnu 
/famfskirt,  passiJ  It  the  Gtneril  Court,  lyr}^,  p  47'. 

^  Jown-il '  f  \r:v   Y'lk,  Mar.-h  9,  I'j'^3.      Cf  .\' t  •  T  S-'jitrmhcr  2y,  I  709. 

*  ',/  the  as.ies5i)r's  uath  in  New  Vorlc,  la.v  <.f  1743,  ■-•■■■  l  i :  "  ■  '■"  swear  .  .  . 
thit  1  ^hi'.!  ...ircfully  .  .  .  C! impute  the  yearl;.'  \a'ui;  f  '.he  in  "iiie  of  mi  :li  t-st.itc, 
an'l  f"r  ca,h  "hilling  wi.ich  I  >»hall  «o  value  tach  perv  n\  i-stat';  at  yearly,  I  shall 
rate  such  person  a  pound,'"  in   \'an  Schaack'j  Law   of  S'fji  York  from  i'i()i  to 

I77J- 

"  American  State  Paperi,  Ftnatif,  I,  p.  429. 

''  .\ct  of  \--)-!,.     Sheph-rdN  Slatntt.  at  I.ar^f  •/  I'lr^inii,  /yg^-iSott,  i,  p.  224. 
.Itnertiiin  St<!te  /'nf-er;,  Jinanie,  i,  p   451. 


382 


The  Income  Tax 


whether  it  be  levied  on  property  or  on  produce,  is  a  tax  on 
the  land -on  the  thing  itself,  a  real  tax.  No  attention  is 
paid  to  the  personal  condition  of  the  landowner;  the  govern- 
ment looks  to  the  land  itself,  as  in  the  case  of  a  tax  on  houses 
or  a  tax  on  tangible  personalty.  The  objective  point  is  the 
thing  rather  than  the  person.  Of  course  it  is  always  the  per- 
son, the  individual,  who  is  under  obligation  to  pay  taxes  to 
the  state.  But  the  endeavor  to  assess  the  individual  as  such 
has  always  met  with  great  difficulty,  and  many  governments 
have  therefore  had  recourse  to  the  various  pieces  of  prop- 
erty rather  than  to  the  person. 

As  we  have  learned  in  an  earlier  chapter,'  when  the  con- 
caption  of  taxable  capacity  first  forced  itself  through   in  the 
early  mediaeval  towns,  we  i.nd  the  general  proj>crty  tax.     In 
all  early  communities,  and  especially  under  the  feudal  system 
land  IS  very  rarely  sold.      We  accordingly  find  the  earliest 
land  taxes  to  be  taxes  on  gross  produce.     The  ability  of  the 
farmer  is  measured  by  the  produce  of  the  land,  the  ability  of 
the  landowner  by  the  rental  from  the  land.      Thus  the  land 
taxes  in   early  medicrval   Europe  were  taxes  on  produce  or 
rents.     In  more  democratic  communities,  like  those  of  Swit- 
zerland, the  land  tax  soon  became  a  tax  on  the  sellin-  value 
In  the   other   European    countries   this  transformation   was 
effected  a  little  later.     Only  in  relatively  recent  times  has  it 
been  deemed  possi'  le  in  most  of  the  European  states  to  get 
more  closely  at  the  taxable  capacity  of  the  land  bv  a   care- 
ful esumate  of  its  actual  yield.     On  the  greater  part  of  the 
continent  of  Europe  to-day  the  land  taxes  are  assessed  on 
the  basis  of  the  yield,  but  now  on  net  yield,  and  detailed 
surveys  and  valuations  are  made  in  order  to  determine  this 
with  accuracy. 

In  America  the  development  was   very   much   the  same 

At  the  outset,  when  land  was  not  bought  and  sold  readily 

he  tax  was  assessed  more  or  less  arbitrarilv,  either  according 

to  the  qua  ity  of  the  land  or  according  to  its  assumed  produce" 

In  only  a  few  cases  was  the  still  more  primitive  method  pur- 

'  Supra,  pp.  6,  43. 


The  Income  Tax  in  the  American  Colonics     383 


3 


sued  of  taxing  land  simply  by  quantity.  But  all  these  taxes 
were  real  taxes  ;  they  were  taxes  on  the  thing  itself,  on  the 
land,  not  on  the  income  of  the  landowner.  When  in  the 
course  of  time  transfers  of  land  began  to  be  more  frequent, 
these  produce  taxes  turned  into  taxes  on  the  actual  or  selling 
value,  as  is  the  case  everywhere  to-day  throughout  the  United 
States.  This  plan,  with  the  democratic  methods  of  assess- 
ment, is  supposed  to  furnish  a  sufficiently  close  approach  to 
the  truth.  We  make  no  attempt,  as  a  rule,  to  ascertain  the 
exact  produce  of  each  parcel  of  land  as  a  basis  for  the  ta:c. 
But  whether  we  assess  land  upon  its  produce  or  upon  its  value, 
is  immaterial  ;  the  tax  is  on  the  thing  itself. 

In  addition  to  this  land  tax,  we  find  in  all  partly  developed 
communities  a  tax  upon  personalty  also.  In  so  far  as  most 
of  the  personalty  is  visible  and  tangible,  the  natural  basis  of 
assessment  is  its  actual  or  selling  value.  This  basis  was  u.sed 
in  all  the  mediaeval  states  as  well  as  in  the  American  colonies. 
But  it  was  veiy  soon  recognized  that  property  alone,  whether 
in  land  or  in  personalty,  was  not  an  adequate  measure  of 
taxable  capacity.  Revenue  is  derived  from  other  sources 
than  property.  Hence  it  was  that  an  attempt  was  made  to 
supplement  the  property  tax  by  a  faculty  tax  upon  persons 
that  derived  revenue  from  these  other  sources.  The  tax  on 
earnings  was  supposed  to  correspond  to  the  property  or  pro- 
duce tax  on  special  pieces  of  personalty  or  realty.  It  was  not 
an  income  tax  in  the  modern  sense.  By  an  income  tax  wc  mean 
a  tax  upon  the  personal  income  of  the  individual.  It  is  a  per- 
sonal tax,  not  a  tax  on  things,  not  a  real  tax.  Allowance  is  made 
for  indebtedness  and  for  other  elements  affecting  the  personal 
situation  of  the  taxpayer.  But  this  faculty  tax,  as  it  was 
called  in  mediaeval  Europe  as  well  as  in  colonial  America, 
was  not  levied  on  the  total  income  of  the  individual.  It  was 
a  tax  not  on  actual  profits,  but  on  assumed  profits.  Just  as 
articles  of  personal  property  were  put  down  on  the  lists  at 
fixed  rates ;  just  as  plots  of  land  were  set  down  at  sums  sup- 
posed to  represent  their  capitalized  annual  produce,  —  so  the 
individuals  subject   to   the  faculty  tax  were  not  required   to 


\4 


384 


The  Income  Tax 


make  returns  of  their  earnings,  but  were  assessed  by  the 
Hsters  at  fixed  amounts.  As  we  have  seen  more  specifically  in 
the  cases  of  Connecticut  and  South  Carolina,  —  and  the  same 
was  true  in  the  other  colonics,  —  the  faculty  tax  was  nothing 
but  a  classified  product  tax,  in  which  different  employments 
and  different  classes  within  each  employment  were  rated  at 
fixed  amounts.  It  was  precisely  for  this  reason  that  the 
faculty  tax,  which  at  the  outset  gave  satisfaction,  soon  bjcame 
antiquated  and  unjust.  Instead  of  being  a  tax  on  actual 
profits  or  gains  as  a  part  of  a  general  tax  on  incomes,  in  which 
attention  might  be  paid  to  the  individual  situation  of  the  tax- 
payer, it  was  nothing  but  an  arbitrarily  levied  class  tax  oncer- 
tain  assumed  earnings.  I'  bore  very  little  relation  to  the 
actual  income ;  it  became  grievous  and  unequal ;  and  it  was 
therefore  allowed  to  fall  into  disuse.  It  never  was  an  income 
tax  in  the  modern  sense. 

On  the  other  hand,  as  we  shall  see  in  the  next  chapter, 
most  of   the  state  income  taxes  of   the  nineteenth  century, 
with  the  exception  chiefly  of  that  of  Massachusetts,  which  is 
simply  a  survival  of  the  old  faculty  tax,  have  been  true  income 
taxes.     They  have  not  been  confined  to  the  assumed  gross 
profits  of  certain  particular  classes,  but  have  been  levied  on 
the  actual  total  income  of  the  taxpayer.     The  difference  be- 
tween the  colonial  taxes  on  profits  and  the  state  income  taxes 
is  very  much  like  that  between  the  European  taxes  on  product 
and  the  income  taxes.     In  Germany,  in  France,  and  in  many 
other   countries,   after   the   gt..eral  property  tax   had   been 
abandoned,  and  after  it  had  been  recognized  that  net  product 
was  in  some  respects  a  better  index  of  taxable  capacity  than 
property,  the  whole  tax  systrm  was  changed  into  one  on  prod- 
uct: that  is,  first  we  had  the  land  tax,  which  was  levied  on  net 
produce ;  then  came  the  buildings  tax,  levied  on  the  rental 
value  of  buildings;  then  came  the  tax  on  capital,  according 
to  the  yield  of  capital;  then  came  the  tax  on  business,  in  which 
the  assumed  profits  were  calculated  according  to  the  outward 
signs.     All  these  were  taxes  on  things  —  on  the  land,  on  the 
house,  on  the  business,  on  the  capital;  and  finally,  to  round 


Tltc  Income   Tax  in  tlic  American  Colonics     385 


out  the  system,  there  was  sometimes  imposed  a  tax  on  the 
remaining  source  of  profit,  that  is,  the  professions  and  em- 
ployments which  yield  a  produce  in  the  shape  of  a  salary  or 
compensation.  These  taxes  are  still  to-day  known  as  real  taxes 
(impSts  n'cls),  or  produce  taxes  (lirtroirsstcHcrn).  It  is  only 
within  a  comparatively  recent  period  that  product  has  come 
to  be  recognized  as  a  less  satisfactory  theoretical  basis  of 
taxation  than  income.  Product  looks  at  the  thing  that  pro- 
duces ;  income  looks  at  the  person  that  receives.  In  the  first 
case,  no  allowance  is  made  for  debts  or  other  qualifying  cir- 
cumstances ;  in  the  second,  such  allowance  is  possible.  As 
a  ;onsequence,  modern  income  taxes  have  been  impo.sed  partly 

place  of,  and  partly  in  addition  to,  these  produce  taxes. • 
The  system  of  real  taxes  is  being  supplanted  by  that  of  per- 
sonal taxes.  Or,  if  we  persist  in  using  the  term  "  income," 
the  first  class  of  taxes  may  be  called  indirect  or  par'^ial  income 
taxes,  because  the  income  of  the  individual  is  only  indirectly 
reached  and  only  partially  assessed;  while  the  new  ar  nore 
general  taxes  are  income  taxes  in  the  proper  sense  the 
term,  and  have  the  characteristics  of  a  personal  tax. 

In  a  subsequent  chapter  we  shall  endeavor  to  ascertain 
what  was  meant  by  the  term  "direct  tax"  in  the  constitution 
of  the  United  States,  and  whether  it  includ'jd  this  faculty  tax  — 
the  only  form  of  profits  taxation  then  known  in  America.  If 
there  is  any  value  in  the  above  e.vposition,  however,  it  is  plain 
that  the  profits  taxes  of  the  American  colonies  were  not  direct 
income  taxes,  and  that  in  so  far  as  they  are  called  income  taxes 
at  all,  they  must  be  classed  as  indirect  income  taxes.  It  is 
remarkable  that  in  all  the  legal  briefs  and  arguments  pre- 
sented to  the  Supreme  Court  in  connection  with  the  first  income 
tax  case  in  1S95  no  reference  was  made  to  the  statement  of 
Oliver  Wolcott,  the  Secretary  of  the  Treasury,  who  in  1796 
drew  up  the  celebrated  report  on  diiect  taxes  in  the  states. 
Wolcott  was  thoroughly  familiar  with  all  the  details  of  the 
laws,  and  in  his  enumeration  of  the  various  taxes  imposed 
he  described  the  faculty  tax  in  the  following  words  :  — 

•  Cf.  the  discussion,  sutrii.  nases  12  et  tci/. 


386 


The  Income   Tax 


"4th.  Taxes  on  the  profits  resulting  from  certain  employments. 
This  head  will  comprise  a  variety  of  taxes  collected  in  certain 
of  the  states  upon  lawyers,  physicians  and  other  profes- 
sions, upon  merchants,  traders  and  mechanics,  and  upon 
mills,  furnaces  and  other  manufactories.  In  some  .states 
these  taxes  are  attempted  to  be  proportioned  to  the  gains  and 
profits  of  individuals,  in  which  cases  they  are  both  arbitrary 
and  unequal ;  in  other  states  the  taxes  are  uniform,  in  which 
cases  they  are  only  unequal. 

"  It  is  presumed  that  taxes  of  this  nature  cannot  be  consid- 
ered as  of  that  description  which  the  Constitution  requires  to 
be  apportioned  among  the  states.  ...  It  is  impo-ssible  to 
render  them  exactly  equal ;  that  they  are  easy  of  collection, 
that  their  operation  is  indirect,  and  that  they  are  capable  of 
being  rendered  perfectly  certain,  are  recommendations  in 
their  favor." ' 

Oliver  Wolcott  clearly  saw,  as  he  expressed  it,  that  the  op- 
eration of  these  taxes  was  indirect,  and,  with  a  full  knowledge 
of  everything  that  had  been  said  on  the  subject  in  every  state, 
he  came  to  the  conclusion  that  they  were  net  direct  taxes  in 
the  contemplation  of  the  constitution.  The  poin  s  which  it 
is  desired  to  emphasize  here  are  that  these  faculty  taxes  were 
not  income  taxes  at  all ;  that  they  were  simply  an  addendum 
to  the  early  land  taxes,  originally  levied  on  product ;  and  that 
with  the  change  of  the  taxes  on  product  into  taxes  on  prop- 
erty, these  faculty  taxes  gradually  fell  into  disuse.  To  call 
them  income  taxes  is  a  misnomer.-  Income  taxes  in  the  mod- 
ern sense  were  levied  for  the  first  time  in  Kngland  in  1799, 
and  it  was  at  a  considerably  later  period  that  licy  spread  to 
other  countries.  To  claim,  then,  that  our  colomal  ta.xes  on 
faculty  were  income  taxes,  betrays  a  confusion  of  thought  and 

'  Ameriutn  Slatr  l'.i/i,i i,  /■inuii,,,  i.  p.  4;t), 

'^  Wolcott,  in  rufcrrinK  '"  'i'>'  soiiRwhiU  peculiar  system  in  I)clau:irc.  cicscril.ol 
aliovf,  said,  "taxes  have  l.ecn  liithcrto  cllcctcd  on  tlie  estimated  annual  income 
of  the  inhabitants."  This  naturally  led  the  counsel  in  the  income  ta\es  of  1S95 
to  si)eak  of  the  Dilaware  system  as  the  "income  t:\\."  I!ut  th.'  same  system  is 
virtually  in  vogue  to-day.  and  no  one  thinks  ic'  calling  it  an  income  tax. 


The  Income   Tax  in  the  American  Colonics     387 


an  ignorance  of  economic  distinctions.  The  faculty  tax  had 
its  origin  in  the  same  motives  that  have  led  to  the  introduction 
of  modern  income  taxes,  but  it  was  not  an  income  tax;  just 
as  the  French  land  and  business  taxes  of  to-day,  levied  on  the 
produce  of  land  and  of  industry  respectively,  are  not  income 
taxes.  In  fact,  the  entire  modern  movement  on  the  continent 
can  be  understood,  as  w  have  learned  in  earlier  chapters, 
only  if  interpreted  as  an  attempt  to  levy.income  taxes  in  place 
of  the  produce  taxes,  among  which  are  to  be  found  imposts 
precisely  analogous  to  the  American  colonial  "faculty  tax." 
The  European  movement  is  one  to  replace  the  "  faculty 
taxes"  by  income  taxes.  If  the  faculty  tax  were  an  income 
tax,  this  movement  would  be  unmeaning. 

The  distinction  between  taxes  on  product,  on  the  one  hand, 
and  taxes  on  income,  on  the  other,  is  one  of  fundamental  im- 
portance in  the  science  of  finance.  To  disregard  it  can  only 
produce  confusion.  To  observe  it  will  enable  us  to  explain 
what  is  otherwise  inexplicable  in  American  economic  history. 


CHAI'TKR    II 


State  Income  Taxes 

TuK  history  of  the  taxation  of  ipconies  by  tlic  separate 
comiuunwcalths  of  the  American  Union  '  may  i>e  ilivided  into 
lour  periods  :  first,  the  sur.ival  and  development  of  the  old 
faculty  tax  of  colonial  times;  occond,  the  partial  resort  to 
income  taxes  as  a  result  of  the  fiscal  difFiculties  of  the  early 
forties  ;  third,  the  utilization  of  the  income  tax  especially  by 
the  southern  commonwealths  during  the  period  of  the  Civil 
War ;  and  fourth,  the  newer  movement  of  the  last  two 
decades. 

Let  us  study  first  the  survival  of  the  colonial  faculty  tax. 

§  I.  The  Siif.'ival  of  the  Cohmial  Faculty  Tax 

During  the  early  decades  of  the  nineteenth  century  not 
only  did  the  faculty  tax  gradually  fall  into  disuse,  but  with  the 
increasir.g  mobility  of  landed  property,  assessment  according 
to  selling  instead  of  annual  value  or  product,  became  universal. 
In  Vermont  the  old  custom  continued  for  several  decades. 
In  the  consolidated  act  of  1825  certain  classes  liable  to  the 
faculty  tax  were  to  be  assessed  according  to  their  gains, 
but  with  both  a  minimum  and  a  maximum  limit.  For  in- 
stance, attorneys,  physicians,  and  surgeons  were  listed  at  not 
less  than  ten  dollars   nor  more  than  three  hundred  dollars, 

'  The  greater  \\\x\  ,  f  this  chajiter  was  iirinto.l  a^  an  a'liJe  in  the  Fclitical 
Sanue  Qn.ir.'cr.y,  \,,1.  s  ,,iSiJ5\  pp.  ;;5  ,-.'  .1,,/.  Ki^ht  i-cars  la'.er  a  more  de- 
tailed stuiywas  maii.-  I,y  I  irlns  (  ).  Kin-nian,  J'u  j';co"it  'J.i.x  in  the  Cmmcn- 
-ccalthi  cf  ihf  rmtiJ  Sute;.  in  t!-,e  I'u^lujtion^  ct  tKi  Anuruan  J.ccnomu 
.-Us.ttiilu'ii,  J  1  Series,  vul.  iv,  nn.  4,  Xtw  Vurk.  190^.  I'ive  .vars  iat"!  the  studv 
was  hrcmght  up  to  date,  so  far  as  i;ra  iuated  in  ■  me  tavc>  were  eoncerned,  in 
Seligman.  Prr^-ejsnf  '/'axtition.  part  i.  sn.  i;;  and  in  iKc  T. 11'  wing  year  Kins- 
man completed  his  study  in  an  artiLlc,  ••  The  I'resent  I'cn^,  i  of  Inct.me  Tax 
.\aiviiy  in   t!:e  An.eri^an   Staler,"    in    i^'U.ri-.i.y  J^urna.    ./ /:.L«t  ";j..',  vol.  xxiii 

(,!90v:    .pp.    y.A.,!:,J. 

38S 


■Stale  Income   Taxes 


389 


"  accordin;,'  to  their  respective  gains."  Merchants  and  traders 
were  taxed  at  figures  varying  from  fifteen  dollars  to  six  hun- 
dred dollars  "  in  proportion  to  their  several  gains,  taking  into 
consideration  the  capital  employed  in  said  business."  Me- 
chanics and  manufacturers  were  assessed  up  to  one  hundred 
dollars,  "  according  to  the  best  discretion  and  judgment  of 
the  listers."  This  survival  of  the  old  custom,  however, 
worked  verj-  badly  and  produced  much  dis.satisfaction.  The 
act  of  1 84 1  dropped  all  reference  to  the  faculty  tax,  and 
although  by  an  act  of  the  following  year  the  tax  was  revived 
as  to  attorneys,  physicians,  and  surgeons,  it  was  finally  abol- 
ished in  1850  amid  general  jubilation.' 

In  Connecticut  the  old  custom  continued,  nominally  at 
least,  until  the  adoption  of  the  new  constitution  in  18 19. 
The  revenue  commission  of  1887  described  the  old  system  as 
follows :  ^  — 

"Connecticut  from  her  earliest  history  had  followed  the 
plan  of  taxing  incomes  rather  than  property.  Those  pursuing 
any  trade  or  profession  were  asse.ssed  on  an  estimate  of  their 
annual  gains.  Real  estate  was  rated  not  according  to  its 
value,  but  in  proportion  to  the  annual  income  which,  on  the 
average,  it  was  deemed  likely  to  produce.  Land  .  .  .  was  put 
in  the  list  at  a  fixed  rate  for  each  kind  ...  not  because 
these  sums  were  deemed  to  be  the  value  of  the  land,  but  be- 
cause they  were  thought  to  represent  the  average  income 
they  would  produce."  This  "ancient  system  of  income 
taxes,  '  as  it  was  called  by  the  commission,  c.me  to  an  end 
in  18 19,  and  was  replaced  by  the  plan  of  taxing  propeny 
according  to  the  modern  methods.^ 

In  Rhode  Island  and  New  Hampshire,  as  we  know,  the  old 
custom  did  not  survive  the  eighteenth  century.  Massachu- 
setts enjoys   the  distinction   of  being  the  only  state  in  the 


¥i 

m 


'  laws  of  I'frnirint,  /?J-,  ..:.  ix:  1S4!.  c.  xvi;  /P/-',  c.  i;  /^JO,  t.  x.\  '\, 
p.  28. 

■■^  /letorl  cftht  Special  C .vimi.non  of  'Sonnectuut  oh  the  Su/>jec/  of  Tuxnlion. 
New  Haven,  1S87,  j;..  -/-lo 


:  ■  y.r.fr::ruf 


390 


The  Income  Tax 


Union  in  which  the  faculty  tax  has  continued  down  to  the 
present  day,  and  lor  that  reason  deserves  a  somewhat  fuller 
treatment. 

In  the  last  chapter  we  treed  the  history  of  the  faculty  tax 
in  Massachusetts  to  the  law  of  1777,  which,  as  we  saw,  was 
virtually  continued  by  the  new  constitution  of  1780.  We 
noticed  the  gradual  process  by  which  the  term  "  facuLy  tax  " 
was  displaced  both  in  popular  usage  and  in  legal  parlance  by 
"  income  tax."  No  change  was  made  in  the  wording  of  the 
provisions  until  1821,  when  an  act  was  passed  which  included 
among  the  sums  to  be  returned  to  the  assessor  *'  tiie  amount 
of  the  income  of  such  inhabitants  from  any  profession,  handi- 
craft, trade  or  employment,  or  gained  by  trading  at  sea  or  on 
land,  and  also  all  other  property  of  the  several  kinds  returned 
in  the  last  valuation,  or  liable  to  taxation  by  any  law."  '  This 
wording  is  repeated  in  the  act  of  !830;2  but  in  this  act  the 
term  "  faculty  "  is  omitted,  and  it  never  reappears  in  later  leg- 
islation. In  the  rc".  ised  statutes  of  1836  anotner  change  was 
made  through  the  omission  of  the  word  "  handicraft."  The 
section  reads  as  follows  :  "  Personal  property  shall,  for  the 
purpose  of  taxation,  be  construed  to  include  .  .  .  income 
from  any  profession,  trade  or  employment,  or  from  an  an- 
nuity, unless  the  capital  of  such  annuity  shall  be  taxed  in  this 
state." 3 

The  ne.\t  change  came  in  the  law  of  1849,*  providing  that 
"  income  from  any  profession,  trade  or  employment,  shall 
not  be  construed  to  be  personal  estate  for  the  purpose  of  tax- 
ation, except  such  portion  of  said  income  as  shall  exceed  the 
sum  of  six  hundred  dollars  per  annum  ;  provided,  however, 
that  no  income  shall  be  taxed  which  is  derived  from  any 
property  or  estate  which  is  the  subject  of  ta.xation."  In  1866 
the  exemption  was  increased  to  one  thousand  dollars,  and  in 
1873,  as  a  result  of  a  compromise  with  those  who  were  at- 


'  Gtneral  Laws  of  Massachusetts  from  the  Adoption  of  the  Constitution  to  iSjt 
(3  vols.),  vol.  ii,  f.aws  of  iSji,  c.  107,  sec.  2. 
'^  Session  f  aws  of  /Sjo,  c.  86. 


»  FnisrJ  Si.^tn.',".,  c. 


*  r,;-,i 


149. 


State  Income   Taxes 


39 » 


tempting  tr)  have  the  law  entirely  repealed,  to  two  thousand 
dollars.*     This  is  still  the  law  to-day. 

In  fixing  the  meaning  of  the  law  of  1849,  two  decisions  of 
importance  were  handed  down  by  the  Supreme  Court.  In 
1856  it  was  decided  that  the  tax  did  not  apply  to  the  income 
derived  by  citizens  of  Massachusetts  from  stocks  of  foreign 
corporations  held  by  trustees.'^  In  1870,  however,  the  more 
important  decision  was  made  that  the  clause  exempting  in- 
comes derived  from  property  already  taxed  did  not  apply  to 
the  profits  of  merchants  and  others  who  emjjloyed  such  prop- 
erty in  their  business.'*  The  result  was  that  although  the  stock 
in  trade  of  a  merchant  was  already  taxable  as  personal  property, 
the  income  which  was  derived  from  his  business  was  again 
liable  to  the  income  tax.  It  was  this  decision  .vhich  led  in 
the  early  seventies  to  the  counter  movement  to  repeal  the 
tax,  and  which  resulted  in  a  compromise  wheroy,  as  stated 
abo\e,  the  limit  of  exemption  was  raised  to  two  thousand 
dollars. 

In  1875  a  comprehensive  report  on  taxation  was  made  by  a 
special  commission.*  The  commission  stated  that  "no  one  of 
our  ta.xer.  reveals  so  great  a  lack  of  uniformity  in  its  construc- 
tion and  enforcement,  and  such  a  wide  difference  of  opinion 
as  to  its  worth,  as  is  found  wi'.h  reference  to  the  income  tax."'' 
They  called  attention  to  the  fact  that  although  the  law  "has 
plainly  and  explicitly  required  the  taxation  of  income,  us  a 
matter  of  fact,  income  i.s  taxed  in  but  very  few  places  of  the 
state  ;  and  the  revenue  derived  from  its  assessment,  cither  by 
municipalities  or  the  state,  is  very  inconsiderable."  Out  of  a 
total  of  340  towns  on  the  valuation  list  of  1873  only  41  reported 
returns  of  incomes,  while  only  five  additional  towns  reported 

'  T.iTui  of  /',^^,  c.  4S;  f.a-.v:  of  iS-;-;,  c.  334. 

-  Susan  I)  irr  vs.  <"\X.y  of  lUjston,  6  Gra>,  p.  I  jl. 

'  \Vil,:ox  t..  ("uunty  f'jmmi-isionerii  of  Mil  !!':scx,  103  Misi.,  p.  1544.  Cf. 
Col!t;ct'-'r  :  '.  Day,  11  \Va!!.,  p.  113. 

*  Fftort  cf  the  Cotnmv.nontn  afpointff  to  ini/uin  in/r  Iht  /.xpi-tlxinrv  vf  rr- 
zi:i>i/r  iJH.i  atn'iiding  the  I.j-jjs  relating-  to  '/'axalion  and  i.xeniftnin  therefrom. 
Boston.  1S75, 


f{ 


392 


The  Income  Tax 


income  and  personal  jiropcrty,  and  only  throe  reported  income 
Iroiu  sal.irii-s  and  learned  professions.  As  a  matter  of  fat  t, 
in  the  overwntlmmg  mass  of  cases  where  the  inconu-  tax  was 
levied  at  all,  it  was  imposed  only  ii[ion  people  who  already 
paid  a  personal  property  tax.  The  commissioners  ipioted  the 
case  of  one  town  of  14,000  inhabitants,  with  a  valu.ition  of 
over  #8,400,000  and  containing  many  prosperous  merchants 
and  mannfactiirers,  where  only  thirteen  persons  —  consisting 
of  cashiers,  law  vers,  clergymen,  physicians,  a  mill  agent,  and 
an  actuary  —  were  assessed  for  i'lcome  on  a  tot.il  valuation  of 
515,121.  The  commission  went  on  to  state  that  "  in  view  of 
the  great  discrepancy  existing  in  the  construction  and  appli- 
cation of  the  law  in  the  few  places  where  anv  attempt  even  is 
made  to  enforce  it,  of  the  small  amount  lU  revenue  obtained 
from  it,  and  of  its  entire  disregard  in  so  great  a  portion  of  the 
commonwealth,  much  doubt  has  been  felt  as  to  the  expediency 
of  retaining  it  on  the  statute  book.  Construed  differentlv  in 
different,  and  perhaps  adjoi.uiig,  places.  — enforced  here,  and 
allowed  there  to  remain  a  dead  letter,  —  it  no  doubt  works 
hardship,  inequality  and  injustice."* 

Several  memoranda  were  submitted  arguing  on  each  side 
of  the  question  of  repeal.  Mr.  Heard  presented  a  strong 
paper  in  which  he  concluded  that  the  "  tax  is  oppressive 
and  unjust  to  individuals,  and  of  very  little  beneiit  to  the 
community."  2  Mr.  Fendergast  objected  strongiv  to  what  he 
considered  the  undue  exemption  of  two  tho'^^sand  d. 'liars.' 
On  the  other  hand,  one  of  the  principal  assessors  of  Cam- 
bridge declared  himself  in  favor  ul  the  tax.  Ca'ling  af.entinn 
to  the  faLt  that  in  one  of  the  wards  ui  Carrbridge  the  as- 
sessment to  the  income  ta.x  amounted  '.')  about  twentv-nve 
per  cent  of  the  total  value  of  per-u;..;!  c-tatc  and  inccme,  and 
that   twentN-sCven  persons    paid 


■  "Tb-  Ma=,-a.h. 


i.«r'   .    .  .".      !/., 


ta; 

<  or. 

o-;i 

.  .lir 

i    - 

n.c  Tr   i.i  3.".  \:: 


^me    tnat    was 

\-i.  '     -   Krr:    .v- 


Sta/c  Income   Taxes 


393 


valued  at  $519,400,'  he  concluded,  as  a  result  of  his  experi- 
ence that  '•  individuals  arc  just  as  ready  and  interested  in 
rendering  an  account  of  their  income  as  they  are  of  any  tax- 
able property  they  may  possess.  "  He  did  not,  however,  ex- 
patiate upon  their  readiness  to  declare  their  personal  property. 

As  a  concession  to  public  sentiment,  as  revealed  by  this 
testimony  of  Mr.  Brown,  the  commission  declaretl  itself 
unable  to  recommend  its  repeal,  chiefly  on  the  ground  of  the 
admitted  defects  of  the  general  i)roperty  tax.  The  general 
property  ta.\  was  working  so  badly  that  in  the  opinion  of  the 
commissioners  even  the  slight  help  given  by  the  income  tax 
in  reaching  the  abilicy  of  those  who  otherwise  would  not 
be  hit  at  ail  was  worth  preserving.  They  found,  however, 
that  the  exemption  was  entirely  too  high,  and  recommended 
its  reduction  to  one  thousand  dollars.  They  also  realized  that 
one  great  defect  in  the  law  was  the  undue  decentralization 
of  the  system,  and  they  suggested  a  "  central  supervising 
department  of  taxes."  ^  Finally  they  called  attention  to  the 
double  taxation  that  was  imposed  under  the  decision  in  Wilcox 
vs.  Middlesex,  and  recommended  a  change  in  the  law  so  as 
*'  to  allow  a  deduction  from  the  gross  income  of  a  sum  equal 
to  six  per  cent  of  the  assessed  value  of  the  property  employed 
in  the  business  from  which  the  income  is  derived." 

None  of  the  recommendations  of  the  commission  was 
followed.  As  a  result  the  administration  of  the  tax  became 
more  and  more  lox  from  year  to  year.  In  1889  a  special 
committee  of  the  business  association  of  Boston  voiced  its 
protest  against  what  was  left  of  the  income  tax.  "  The  bu.si- 
ness  men  of  this  city,"  said  the  report,  "are  now  living  under 
an  income  tax  than  which  nothing  more  irritating,  indefensible 
and  unjust  can  be  well  imagined."^     The  report  dealt  espe- 


'  "The  Income  Tax,  Why  it  should  he  Retained,  and  the  Importance  of 
Equally  F'nforcinf;  It."     I!y  Dr.  A.  /.  lirown.     Of.  iit.,  pp.  441-450. 

-  Op.  cit.,  p.  55. 

^  Fepert  of  Special  lorn  mi  Iter  on  Ta.xation.  Boston  Kxecuti'e  Business 
.Issoiiiifion.  I!iisti)n,  1SS9,  p.  11.  The  report  wao  signed  liy  a  cmnmillee  of 
f.'.o  pit'iuincnt  !.L.siiit^i  ii.tr.,  hca.it  ';  i.y  Mr.  Ji.i.ath.".ii  .\.  Lain,, 


394 


Thf  huomc   Tax 


cially  with  tl)c  injiistico  of  the  doiihlo  taxation  imposed  upon  the 
business  men  in  taxinj;  the  stmk  in  tiatle  as  well  as  the 
income  derived  from  the  business.  Relerrinj;  to  the  rcmces- 
sion  on  the  part  of  the  assessors  that  the  tax  should  Ik;  levied 
only  on  the  surplus  over  six  per  cent  of  the  capital,  the 
committee  said:  "We  repudiate  this  concession  as  by  no 
means  meeting;  the  facts  or  justice  in  tlie  case,  especially 
when  what  a  man  spends  out  of  his  business  is  r-  oned  as 
profits,  whether  or  not ;  and  the  gains  or  profits  i..  business 
can  rarely  be  determined  until  the  same  is  sold  out  or  wound 
up."  Largely  because  of  this  confusion  of  the  income  tax 
with  the  personal  tax,  they  concluded :  "  The  more  your 
Committee  consider  the  whole  subject,  the  more  they  -re 
impressed  with  the  needlessness,  as  well  as  the  weakness  in 
all  our  dealings  with  personal  estate."  ' 

Two  years  later  a  special  commission  was  appointed  by  the 
city  of  Boston  to  coii.sider  the  question.  This  commission 
came  to  the  same  conclusion,  stating  that  "in  the  taxation  of 
income  derived  from  personal  property  there  is  also  in  this 
state  an  extraordinary  injustice  and  inequality."*  They 
called  attention  to  the  fact  that  the  only  part  of  the  income 
tax  which  was  ever  assessed  was  that  upon  b....;n^  men  wli.> 
already  paid  a  tax  on  stock  in  trade,  and  they  naturally 
adverted  to  the  essential  injustice  of  this  .scheme.  "  There  is 
no  reason  why  the  income  derived  from  taxed  personal 
property  should  be  taxed  which  does  not  apply  to  the  income 
derived  from  taxed  real  estate.  No  attempt  is  made  to 
violate  common  sense  and  common  justice  by  taxing  income 
from  real  jiroperty,  and  yet  that  inc  c  depends  upon  care 
and  skill."  ' 

This  effort  of  the  business  men  to  free  themselves  from 
the  survival  of  the  faculty  tax  was  continued  during  the  ne.xt 


*  Rtport  cf  Special  Committet,  ,'/.  .;.'.,  p.  121. 

*  Afessit^'f  of  the  Aftiyor  tritnsmittiitff  Keport  of  the  Special  Commission    on 
Taxation.     Hostim,  iSiii,  p.  19.      The  commissiun  consii'dl  uf  Messrs.  George 

G.  (.rocker,  Jonathan  A.  l,anc,  and  William  -Minot. 
"  :t-  •:';  ;-;■■■  -s-;:. 


Utah-  Income   Taxes 


395 


few  years.  In  1893  a  joint  special  committee  of  the  le^is- 
laturo  was  appointed  to  con  ider  the  whole  problem  of  taxation, 
and  some  interestin;;  testimony  was  t;iven  on  the  subject  of 
the  income  t:i\.  Mr.  Jonathan  A.  Lane  effectively  quoted 
the  reports  f)f  t.i.v  conunissions  in  other  commonwealths,  and 
characterized  the  effort  to  ta.\  tho  jiroperty  and  also  the  income 
ari.'iin;;  from  its  em|jioyment  as  intolerable  double  ta.Kation. 
Reterrin;;  to  the  attempted  division  of  a  business  man's  gains, 
ascribin;^  a  i)orti.<n  ol  it  to  his  capital  and  the  remainder  to 
his  fa' ulty,  and  thar;,Mn;4  a  tax  upcm  the  latier,  Mr.  I.ane 
stated:  "  Such  a  division  is  as  impracticable  as  it  is  absurd. 
It  violates  common  sense,  every  aspect  of  it,  and  it  is  im- 
possible to  conceive  ni  such  a  thint;  as  income  derived  from 
capital  without  some  power,  force,  or  effort  to  get  that  income 
out  of  capital.  " '  He  referred  to  the  fact  that  in  Huston  the 
assessors  usually  deducted  si.v  i)er  cint  of  the  [)rofits  of  ca|»i- 
tal  before  assessin;,^  the  ta.\,  and  he-  qu'Ked  the  reply  of  the 
corporation  co'.insel,  who  had  been  asked  for  an  opiniim  bv 
the  Boston  board  of  assessors  :  "  There  is  no  reason,  so  far 
as  I  can  see,  why  you  should  deduct  the  amount  of  si.x  {)er 
cent  of  such  value,  any  more  than  the  am(Hmt  of  four,  or 
five,  or  seven  {)er  cent,  or  an  amount  arrived  at  in  any  other 
way.""  .Mr.  linuic';tt,  ore  '^i  ire  ta.x  c  -.lissioners,  reported 
that  the  assessment  of  the  tax  "  is  confined  chiefly  to  the 
larger  places,  where  a  large,  an  immense  business  is  done."' 

The  committee,  after  considering  this  subject,  reported 
against  the  proposition  to  repeal  the  tax.  Their  reason,  how- 
ever, is  rather  remarkable:  "  If  income  was  a  mere  offshoot 
or  natural  product  of  i)r<iperty  already  taxed,  the  taxation  of 
such  income  might  indeed  be  double  taxation.  Hut  no  reason- 
ing has  been  adduced  tending  to  make  .such  a  [iropo.sition 
entirely  clear.  To  obtain  an  income,  whether  b;ised  upcm 
professional  ability,  business  capacity,  or  mechanical  skill, 
requires  the  use  of  applicati(jn  oi  ability,  shrewdness,  talent, 

'  Hearing  'r'or^  the  /  int  Sf-^  i.il  i'  •nonllee  iipputt'  I  to  i^n  nliii'ilf,  f". 
r:n^'  mJ  rtvi:e  tkf  Statutt,  ■/'  thi:   >'  in'mn-vealth  relitin^  to   '/',ixii,^>i,  p.  '/>. 

ii-jal-^ii,    l>_/j.  -    ty     Lit.,   p.  'j-j.  -    Up.  iti.^  p.    102, 


396 


The  Income   Tax 


•t 


and  adroitness.  These  qualities  and  forces  combined  fix  and 
determine  \.\iQ  faculty  oi  the  individual  and  it  is  \}a\i  faculty, 
or  actual  ability,  which  we  tax."'  The  learning  and  good 
judgment  of  the  commission  may  be  inferred  from  the 
following  quotation  :  "  The  taxation  of  incomes  in  Englard, 
Germany  and  I  ranee  is  not  only  popular,  but  the  condition 
of  the  people  is  such  in  those  countries  that  any  attempt  to 
abolish  this  form  of  taxation  would  probaoly  result  in  a 
revolution."  In  view  of  the  fact  that  the  income  tax  had  just 
been  introduced  after  a  hard  fight  in  Prussia,  that  it  did  not 
exist  at  this  time  in  most  of  the  other  German  states,  and 
that  it  had  no  chance  at  all  in  France,  this  piece  of  infor- 
mation is  delicious.  Believing,  therefore,  that  "  the  faculty 
possessed  by  an  individual  is  rendered  especially  valu  ible  by 
the  protection  afforded  by  the  state,"  the  committee  concluded 
that  "  to  allow  such  individual  to  escape  from  his  just  obliga- 
tion would  be  in  entire  opposition  to  the  jjractice  long  in  force 
in  this  commonwealth."-  A  strong  dissenting  opinion,  hov/- 
evcr,  was  submitted  by  Mr.  Charles  F.  Brown.^ 

Three  years  later  a  commission  of  entirely  different  calibre 
was  appointed  to  consider  anew  the  entire  question  of 
taxatirn.  After  making  a  careful  investigation  of  the  whole 
situation,  the  commission  found  that  in  all  the  cities  of  the 
state,  except  Boston  and  Somerville,  the  a.ssessed  income  on 
which  the  tax  was  imposed  amounted  to  $3,880,220  out  of  a 
total  personal  property  of  $194,783,;'! 8;  and  that  in  Boston, 
according  to  the  last  returns, —those  of  1894,  —the  assessed 
income  was  L-eturned  at  $742,iooout  of  a  total  personal  prc::)erty 
ot  over  $38,000,000.*     In  the  state  as  a  whole  the  assessn.ent 


t 


'  .•/  Full  Kfport  of  ,:,f  Jmnt  Speciii!  Commit/,,  on  T.ix.ition,  l\e,ommendations 
and  Codifiaitiom  reii'hig lo  Ihf  l.,uvs  of  T.ix,iti,'n.     IJostcin,  1804,  ]>.  :il. 

■i  Of.  .it.,  p.  ,-,4. 

3  "  Report  of  the  Minority  relative  to  tlie  Taxation  of  Incomes  derived  from 
I'ropcrty  subject  to  a  Tax."      Of.  til.,  pp.  50-52. 

*  A'lfort  of  the  Commission  nffinl,:/  to  ni./uirf  into  ihf  /■'..xffi/ieiicv  of  re- 
visiii!^  and  amending  the  t.aws  of  the  Ccmmonwealt/i  relating  to  Taxation,  pp. 
46-4S.  Boston,  iH-j;.     The  report  was  signed  by  James  K.  I  hi  Alvan  Bar- 

rows, T.  Jeffersin  C'tiolidfje  and  I".  \V.  I'aus^i};. 


State  Income  Taxes 


397 


of  income  in  all  tlie  towns  amounted  to  $1,529,705  out  of  a 
total  personal  estate  of  5i47,8cx),703.'  These  figures  are 
sufficiently  enlight'*-  '..g  and  show  what  an  absolute  shadow 
of  its  former  sc  1  tlu;  Iul.-.I'v  tnv  had  become.  The  commis- 
sion, aware  of  tl  •  f?  'lure  ot  the  ironeral  property  tax,  considered 
carefully  the  ac  ■'  Oiiii)-  of  rc^jlacir.g  it  by  a  general  state  in- 
come tax.  They  couc-'tiv.- 1'^,!'-  such  a  tax  "  would  avoid  at  least 
one  great  hardship  of  constant  occurrence  under  the  present 
system;  for  unlucky  investments  yielding  no  income  al  all 
would  not  be  taxed,  as  they  now  are."  But  they  conclude 
that  "  it  suffices  to  .say  that,  in  the  present  situation  of  this 
country,  with  our  political  traditions  and  business  habits,  we 
are  of  the  opinion  that  an  income  tax  would  prove  exceedingly 
difficult  to  administer  with  certainty  and  with  equality  of  treat- 
ment as  between  different  taxpayers.  .  .  .  Wo  fear  that  no 
effective  public  opinion  v/ould  be  present  to  aid  the  adminis- 
tration of  a  Stat'  income  tax,  and  that  evasion  and  conceal- 
ment would  take  place  to  so  great  an  extent  as  to  render  it 
ineffective  and  deservedly  unpopular."^ 

Since  1897  no  further  attention  has  been  paid  to  the  income 
'dx.  None  of  the  recent  reports  of  the  tax  commissions  of 
Massachusetts,  such  as  tho.se  of  1903,  1907,  and  1908,  has 
even  dignified  the  subject  by  a  reference.  The  larger  ques- 
tions connected  with  the  taxation  of  business  and  of  corpo- 
rate property  have  comoletely  overshadowed  the  problem  of 
what  to  do  with  the  remnants  of  the  faculty  tax.  The  as.se.ss- 
ment  of  .salaries  and  personal  incomes  has  virtually  disap- 
peared, except  in  an  occasional  instance  of  a  college  professor 
or  of  a  state  official,  and  in  the  few  cases  where  business  in- 
comes are  assessed  at  all,  the  assessment  is  added  to  the  per- 
sonal property  tax  and  does  not  figure  separately  on  the  tax 
books.  What  is  therefore  still  called  the  income  tax  in  Mas- 
sachusetts is  nothing  but  an  unequal  and  entirely  arbitrary 
additional  assessment  upon  a  few  members  of  the  professional 
classes  and  a  few  large  business  men  selected  at  haphazard 
in  Boston  and  one  or  two  other  towns.     Instead  of  being  an 


* 


'  Of<.  ,  //..  n.  2(n. 


-  Ofi.  rit,^  nn.  %(y-9l.f 


398 


The  Income   Tax 


i1 

h 


i 


income  tax,  it  is  nothing  but  a  simulacrum  of  an  income  tax ; 
instead  even  of  being  a  faculty  tax  such  as  existed  during 
colonial  days,  it  has  become  nothing  but  the  torso  of  a  faculty 
tax. 

The  only  other  state  in  which  the  faculty  tax  lasted  during 
the  nineteenth  century  is  South  Carolina.  In  Delaware  and 
Maryland,  as  we  have  seen,  the  tax  disappeared  before  the 
close  of  the  eighteenth  century  ;  but  in  South  Carolina 
the  first  tax  law  under  the  new  con.stitution  which  taxed  *'  the 
profits  of  all  faculties  and  professions,  the  clergy  excepted, 
factorage  employments,  handicrafts  and  trades,"  ^  remained, 
with  a  few  slight  changes,  in  force  up  to  the  Civil  War.  In 
1813  a  special  tax  of  four  and  one-half  mills  was  imposed  on 
the  salaries  of  all  state  officials  ;2  and  was  increased  in  the 
following  year  to  sixty-two  and  one-half  cents  on  every 
hundred  dollars.  In  1838  the  system  was  slightly  changed 
so  as  to  provide  for  a  tax  of  six  per  mill  on  income  derived 
from  employw.?nts,  faculties,  and  professions,  and  from  com- 
missions received  by  vendors,  factors,  and  commission 
merchants.  Exemptions  were  allowed  to  clergymen,  school- 
teachers and  mechanics,  .^ad  it  was  specially  provided  that 
attorneys  should  pay  upon  their  entire  professional  income.^ 
The  yield  remained  as  before,  howevf  r,  quite  insignificant. 
The  later  history  will  be  touched  on  hereafter. 

The  faculty  tax  was  also  employed  in  South  Carolina  for 
local  purposes  for  a  time.  In  1809  an  ordinance  of  the  city 
of  Charleston  declared  subject  to  taxation  "all  profit  or 
increase  arising  from  the  pursuit  of  any  faculty  or  profession, 
occupation,  trade  or  employment."  Clergymen,  judges  ar.d 
schoolmasters  or  other  teachers  were  exempt,  and  the  rate 
was  one-third  of  one  per  cent.*  In  1844  the  same  words 
were  used  in  a  Charleston  ordinance,  except  that  "  gross  profit 

'  ^upra,  p.  379. 

"  McCord,  Statute!  of  South  dro/in,!,  vol.  v,  p.  712. 

*  //'iJ.,  vol.  vi,  p.  605. 

♦  This  or.linanco  is  quDtinl  in  City  C.mncil  rj.  I.t-e,  3  Hrevard,  p.  226,  decided 
in  1812,  which  held  that  public  salaries  were  not  included. 


•••« 


State  Income  Taxes 


399 


or  gross  income  "  took  the  place  of  "  all  profit  o''  increase." 
Exemption  was  also  extended  to  mechanics  so  as  to  conform 
to  the  state  system.' 

In  a  few  other  states  we  find  sporadic  instances  of  survivals 
of  the  faculty  tax.  Thus,  in  Pennsylvania  the  law  of  1783, 
which  was  discussed  in  the  last  chapter,^  survived  for  a  time. 
In  1799  mechanics  and  manufacturers  were  agaui  included  in 
the  tax,''  and  in  181/  ministers  and  schoolmasters  were  also 
made  taxable.*  The  tax,  however,  was  rarely  enforced,  and 
afforded  virtually  no  revenue.  Of  its  temporary  resuscitation 
in  the  forties  we  shall  speak  on  the  next  page. 

E.xcept  in  the  two  states  of  Massachusetts  and  South  Caro- 
lina, thus,  the  old  custom  of  assessing  profits  as  an  adjunct  to 
the  property  tax  had  totally  disappeared  by  ^he  middle  of 
the  century.  Moreover,  the  assessment  of  real  estate  accord- 
ing to  profits  had  almost  everywhere  been  supplanted  by 
assessment  on  selling  value.  The  only  e.xception  was  Dela- 
ware. In  that  state  it  is  still  provided  that  when  houses  or 
lands  yield  an  annual  rent,  the  owner  shall  be  assessed  for 
every  twelve  dollars  of  rent  as  for  one  hundred  dollars  capi- 
tal;  while  in  the  case  of  ground  rents  eight  dollars  of  rent 
are  to  be  assessed  as  one  hundred  dollars  of  capital.^  In 
practice,  however,  this  method  is  now  confined  to  assessments 
for  school  purposes  only,  while  for  county  and  municipal 
purposes  real  estate  is  assessed,  as  elsewhere,  on  selling 
value. 


ik 


§  2.    The  Period  of  the  Forties 

The  second  phase  of  income  taxation  in  the  American 
commonwealths  began  in  the  early  forties.  It  is  well  known 
how  the  withdrawal  of  the  federal  government  from  the  field 
of  internal  improvements  and  the  distribution  of  the  surplus 

'  Quoted  in  State  Ameiulmcnt,  Illfe,  3  Strubhart,  p.  318. 

^  Supra,  p.  378. 

'  Laws  o/tlif  Conviionweallh  of  J'ftiiisylrnnia  (Dallas),  vol.  vi,  p.  597. 

*  Henninfj'*  S/,i/n/es  iil  large,  vol.  is,  p.  353. 

'  KeiiseJ  Stalules  of  Delaware,  1S39,  c.  x,  sees.  3  atiil  ;,  pp.  IO7-I08. 


ff 


m 


400 


T/ie  Income   Tax 


revenue  in  1836  started  the  commonwealths  on  thai  wild 
career  of  extravagance  which  soon  resulted  in  disaster. 
Many  of  the  states  found  themselves  involved  in  serious 
financial  difficulties  at  the  close  of  the  thirties,  and  the  matter 
of  the  assumption  of  the  large  state  debts  by  Congress  be- 
came a  burning  political  question  in  the  early  forties.  When 
this  project  came  to  naught,  and  the  states  found  that  they 
had  to  rely  upon  their  own  efforts  in  order  to  meet  the  inter- 
est charges  on  their  swollen  indebtedn-^ss,  several  of  them 
were  confronted  by  the  necessity  of  increasing  their  revenues, 
and  a  few  turned  to  the  project  of  some  form  of  income  taxa- 
tion. 

The  first  state  to  resort  to  this  expedient  was  Pennsyl- 
vania. We  have  seen  in  the  last  paragraph  that  the  colonial 
faculty  tax  had  lingered  along,  but  that  it  had  become  virt- 
ually a  dead  letter.  Now  in  1840  it  was  partly  resuscitated. 
The  law  of  that  year  imposed  a  tax  of  one  per  cent  upon  all 
salaries,  and  of  one  mill  upon  each  dcjllar  received  from  every 
trade,  occupation,  or  profession  not  already  taxed  by  the 
commonwealth. •  The  law  of  the  following  year  increased 
the  tax  upon  salaries  to  two  per  cent,  and  upon  the  profits 
from  trade,  occupation,  or  professions  to  one  per  cent,  but 
also  provided  for  an  exemption  of  two  hundred  dollars  on  all  in- 
comes.''^ In  1844  a  slight  change  was  made  in  the  law,''  and  in 
this  form  the  tax  lingered  along  for  a  few  decades.  In  1854 
it  was  provided  that  the  tax  on  trades,  professions,  and  occu- 
pations, when  levied  for  school  purposes,  should  not  be  less 
than  fifty  cents,*  a  figure  increased  in  1857  to  one  dollar.^ 
What  the  real  proceeds  of  the  tax  were,  it  is  impossible  to 
state,  as  no  separate  accounts  were  kept.  An  indication  is, 
however,  afforded  by  a  statement  in  the  governor's  message 
that  in  1843,  out  of  a  total  revenue  from  taxation  of  $910,000, 
the  amount  received  from  ofifices  was  S 1 386.®     So  insignificant, 


'  I a-jis  of  1S40,  .let  no.  232,  sec.  2. 
5  Laxvs  0/1841,  no.  117,  sec.  9. 
•  /.(7T('v  of  iS^4,  nu.  6io,  sec.  ?o. 

'  r. r.r-frnrir' '.  ^fe■:^,^cf  ■ 


'  /</?w  of  1S44,  no.  318,  sfc.  74. 
■''  Laxin  of  iS^j,  no.  667,  sec.  2. 


W-vi^:M' 


State  Income    Taxes 


401 


in  fact,  had  the  tax  become  that  it  was  allowed  to  disappear  in 
1 87 1,  when  the  law  was  repealed. 

What  had  been  done  in  Pennsylvania  was  now  attempted 
in  some  of  the  other  states,  especially  in  the  South.  In  Mary- 
land, where  for  many  decades  there  had  b^  -n  no  direct  taxes 
at  all  upon  property,  a  general  assessment  was  imposed  in 
1841,  in  order  to  raise  the  required  revenue.'  In  the  follow- 
ing year  a  law  Imposed  a  tax  of  two  and  one-half  per  cent 
upon  salaries  and  emoluments,  and  all  incomes  and  profits 
from  professions,  faculties,  and  employments. 2  The  law  was 
like  that  of  Pennsylvania  in  that  it  exempted  salaries  of 
judges  and  clergymen  ;  but  it  differed  in  that  it  also  exempted 
incomes  derived  from  taxed  property,  as  well  as  incomes 
under  five  hundred  dollars.  A  progressive  tax  was  imposed 
by  another  law  on  all  ground  rents,  so  arranged  as  to  be 
equivalent  to  a  tax  of  two  and  one-half  per  cent  upon  an 
annuity  amounting  to  ten  per  cent.^  Later  on,  however,  the 
rate  of  the  tax  on  ground  rents  was  made  *he  same  as  that  on 
other  incomes,  except  that  five  hundred  dollars  was  not  ex- 
empt. An  interesting  feature  of  this  law  was  the  provision 
requiring  taxes  upon  official  and  other  salaries  to  be  paid  by 
the  employer  or  by  the  state  respectively.  It  is  not  worth 
while,  however,  to  go  into  the  administrative  features  of  the 
law,  because  the  whole  system  worked  most  unsatisfactorily. 
The  governor,  in  his  message  of  1844,  stated  that  there  was 
a  deplorable  remissness  in  the  execution  of  the  tax  laws; 
"  some  of  the  counties  have  utterly,  and  others  partially,  dis- 
regarded them."  He  stated  that  the  revenues  could  "not  be 
materially  increased  by  the  income  tax  heretofore  partially 
collected."  ■•  A  few  vears  later,  according  to  the  state  treas- 
urer's  report  of  1849,  no  income  tax  at  all  seems  to  have 
been  collected,  and  in  1850  the  law  was  virtually  repealed  by 
an  act  which  provided  that  "  the  collectors  should  not  be  held 
liable  for  the  recovery  of  the  tax  if  they  proved  it  not  to  have 

*  Report  of  the  Afarylctni  Tax  Commission  to  the  General  Assembly.  Balti- 
more, 188S,  pp.  cx.icxviii,  c.\liii.  -  f.a-vs  of  iS //-iS-fj,  c.  325. 

'  Laws  0/  jSji-  iSjj.  c.  32c.  *  Quoted  in  Kinsman,  op.  cit.,  11.  34. 
2  P 


402 


The  Income   Tax 


been  collected."  *  We  arc  told  in  the  proceedings  of  the  state 
constitutional  convention  that  the  law  was  repealed  "  because 
of  its  inquisitorial  character,  its  impertinent  scrutiny  into  the 
affairs  of  private  life,  and  of  other  d'fTiculties  which  it  had 
to  encounter,  and  the  frauds  and  impositions  it  caused,  and 
abov^  all,  its  utter  failure  to  produce  a  sufficient  sum."^ 

While  the  resuscitation  of  the  income  tax  in  Pennsylvania 
and  its   introduction  in  Maryland   in  the  early  forties  were 
due  primarily  to  fiscal  needs,  there  was  a  group  of  southern 
states  where  we  find  at  this  time  a  development  of  some  form 
of   income  tax;aion,   partly  indeed  as  a  result  of   fiscal  exi- 
gencies, but  partly  also  as  a  concession  to  the  demand  for 
more  equal  taxation.     As  is  well  known,  the  southern  states, 
not  only  in  colonial  times,  but  in  the  early  part  of  the  nine 
teenth  century,  had  a  system  of  taxation  which  differed  ma- 
terially from  that  found  in  the  rest  of  the  country.^     At  first,  it 
will  be  remembered,  poll  taxes  and  customs  played  a  much 
larger  role  than  in  the  middle  or  northern  colonies.     Then, 
when  a  system  of  land  taxes  developed,  they  were  of  a  rather 
primitive  kind ;   and   although  we  occasionally  find   faculty 
taxed  in  some  of  the  southern  states,*  there  was  as  a  rule  no 
development  of  the  general  property  tax  as  in  the  remainder 
of  the  country.     When,  now,  in  the  early  forties,  the  cotton 
factors,  the  mercnants,  and  the  professional  classes  began  to 
assume  a  distinct  importance  side  by  side  with  the  large  plan- 
tatio"  owners,  the  movement  set  in  to  draw  them  into  the 
meshes  of  the  taxgatherer.     In  some  places  this  assumed  the 
form  of  a  system  of  license  taxes,  which  has  continued    in 
most  of  the  southern  states  down  to  the  present  day.     In  a 
few  eases  it  took  the  form  of  the  attempt  to  introduce  an 
income  tax.     This  was  the  case  in  Virginia,  in  North  Carolina, 
and  in  Alabama. 

In  Virginia  the  taxation  of  incomes  beg?n  in   1843.     In 

•  l.invsof  tS4q  c.  294. 

■^  Debates  and  t'roeeediitgs  of  the  Maryland  Reform   Convention,  to  revise  the 
State  Constitution,  vol.  iii,  p.  227. 

'  Seligman,  Essays  in  Taxation,  cliaptcr  I.  *  Supra,  p.  ^79. 


\\ 


'  m 


State  /iiioiiie  Taxes 


403 


that  year  a  law  was  enacted  imposing  what  were  technically 
known  as  a  "tax  on  incomes,"  a  "tax  (ju  fees,"  and  a  "tax  on 
interest."     The  tax  on  incomes  was  a  tax  of  one  per  cent  on  all 
"ncomes  ever  four  hundred  dollars  "  in  consideration  of  the 
discharge    of    any  office    or  employment    in    the    service    cf 
the  state,  or  of  any  corporation,  company,  firm  or  person." 
The  income-  of  ministers  of  the  gospel  and  incomes  from  labor 
in  mechanic  arts,  trades,  handicrafts  or  manufactures  were 
e.xem{)t.     The  "  tax  on  fees,"  at  the  same  rate,  was  imposed 
on  attorneys,  physicians,  dentists,  and  "  all  other  persons  in 
respect  to  their  fees  above  four  hundred  d<jliars,  derived  from 
any  office,  calling  or  profession."     The  "tax  on  interest"  was 
at  the  rate  of  two  and  one-half  per  cent  on  all  "interest  or 
profit,  whether  arising  from  money  loaned,  or  from  bonds, 
notes  or  other  securities  for  money  or  from  bonds  or  certificates 
of  debt  of  states  or  public  corporations."'     In  other  words, 
this  was    a  tax  on    salaries   and  professional  income,  and  a 
partial  tax  on  funded  income,  with  separate  rates  for  temporary 
and  for  permanent  income.      In    184^)  the  "  tax  on  interest" 
was    reduced    and    made  applicable  only  to  profits  over  six 
hundred  dollars.^     In  1853  that  part  oi  the  tax  which  applied 
to  income  from  public  securities  was  raised  to  three  and  one- 
half  per  cent.     But  by  this  law  the  tax  on  "  incomes  "  and 
"fees  "  was  graduated.     Incomes  behnv  two  huaJred  dollars 
were  exempt;   on  incomes  from  two  hundred  dollars  to  two 
hundred  and  fifty  dollars  the  r:ite  wa'  .  ne-(|uarter  of  one  per 
cent;  and  it  rose  by  regular  incremc.ts  to  one  per  cent  on 
incomes   of  over  one  thousand  dollars.'     In   1856  and    1859 
some  minor  changes  were   made  in  the  law,  but   it  was  not 
until  the  Civil  War  period  that  it  was  converted  into  a  general 
income  tax.     That  period  will  be  treated  in  the  next  section. 
In    North    Carolina  the  income  tax  dates  from    1849.     In 
that   year  a  law  was  passed    with    the  following  preamble: 
"Whereas  there  are  manv  wealthv  citizens  of  tliis  state  who 


'  r.a'.v  of  Mar  h  27,  1S4J;    .■/  /;  i-  f2-iS/7.  [.p    '''-'*• 
-  I.a*  >,(  K..:',r  jarv-  2^.  1^4'):    .ht:  /■  .■:-i-  ;/>,  [,.  7. 
•  Law  of  .\pril  7,  1S53;    Art!  rf  j; ^^-ji-'l,  c.  8. 


% 


m 


404 


The  Income  Tax 


derive  very  considerable  revenues  from  moneys  which  pro- 
duce interest,  dividends  and  profits,  and  who  do  not  contribute 
a  due  proportion  to  the  public  exigencies  of  the  same,  bo  it 
resolved,"  etc.  The  dissatisfaction  here  manifested  led  to  a 
thrce-per-ccnt  tax  on  all  moneys  at  interest,  and  on  all  profits 
from  moneys  invested  in  shares  or  in  trade.  Profits  to  the 
extent  of  sixty  dollars  were  exempt.  The  law  also  provided 
that  after  the  first  five  years  of  their  practice  all  professional 
classes  except  ministers  and  judges  should  pay  an  annual  tax 
of  three  dollars,  provided  their  income  exceeded  five  hundred 
dollars.*  The  tax  was  popularly  known  as  the  "  tax  on  salaries 
and  fees,"  but  it  was  in  reality  a  kind  of  license  tax  levied  on 
all  commercial  and  precarious  incomes.  In  185 1  the  exemj)- 
tion  was  reduced  from  sixty  to  thirty  dollars,  and  other 
slight  alterations  were  made.^  In  1855  the  exemption  was 
still  further  reduced  to  six  dollars,  and  various  minor  changes 
were  introduced.^  In  1857  the  rate  was  increased  to  four 
per  cent,*  and  in  1859  the  tax  was  further  extended  and 
slightly  changed  so  that,  while  the  rate  of  income  from 
interest  remained  at  four  per  cent,  the  tax  upon  salaries  and 
fees  was  now  applied  to  ail  individuals  at  the  rate  of  one 
per  cent.^  Soon  afterward,  however,  the  Civil  War  broke 
out,  which  led  to  a  notable  change  in  the  system. 

In  Alabama  the  movement  toward  the  taxation  of  income 
dates  from  1843.  The  new  tax  began  there,  as  in  the  other 
southern  states  that  have  been  noticed,  as  a  tax  on  certain 
business  incomes,  at  the  rate  of  twenty-five  cents  on  every 
hundred  dollars  of  the  income  of  auctioneers,  factors,  cotton 
brokers,  and  commission  brokers.^  In  1844  it  was  reduced 
to  twenty  cents,  and  there  was  added  a  tax  of  one-half  of 
one  per  cent  on  the  income  of  lawyers,  physicians,  surgeons, 

•  North  Carolina,  Ads  of  /5./S-i8if<),  c.  77,  p,  129.     Law  of  January  29, 1849. 
'  L<i-us  of  iSjo-iS^/,  c.  120,  sec.  2. 

'  Laws  of  1^^4-iSjj,  c.  37,  sees.  19-21. 

•  Laws  of  i8j6-tS^7,  c.  34,  sees.  19-21. 
'  I.a-iis  of  rS-;S-iSjg,  c.  25,  sec.  27. 

•  Alabama,  Laws  of  1842-1S4S,  act  1,  sec.  5. 


4^«iisit-«W<Ai 


Sfaie  Income  Taxes 


405 


and  dentists,  and  of  all  persons  receiving  salaries  from  the 
state  government,  or  from  any  bank,  mercantile  house,  or 
educational  institution.'  If  any  one  refused  to  hand  in  a 
return,  he  was  to  be  assessed  at  three  thousand  dollars.  In 
1848  the  tax  on  professions  was  extended  to  the  income  of 
"every  person  of  whatever  craft,  employment  or  profession 
except  arti.sans  and  manual  laborers.'"'*  The  law  also  pro- 
vided that  the  tax  upon  commissions  and  brokers  should  not 
apply  when  the  capital  invested  in  the  business  was  ta.xable. 
In  1850  it  was  enacted  that  surj^eons,  physicians,  and  dentists 
who  had  practised  three  years  mij^ht  pay  either  a  specific  tax 
of  ten  dollars  or  a  one  and  one  half  per  cent  tax  upon  their 
annual  income.  Thus  the  professional  income  tax  was  again 
partly  changed  into  a  license  tax,  and  after  a  few  years  it 
became  entirely  a  license  tax.  In  the  case  of  public  officials, 
clerks,  and  the  ofRcers  of  corporations,  the  tax  was  now  to  be 
levied  only  on  the  income  above  five  hundred  dollars.  Cotton 
pickeries  and  warehouses  for  the  storage  of  cotton  and  other 
products  were  made  taxable  at  the  rate  of  one  per  cent  of  the 
income.3  The  tax  continued  in  this  ihape  until  the  Civil  War. 
Finally,  it  may  bo  stated  that  in  Florida  the  system  was  also 
initiated  in  1845,  when  a  tax  of  twenty  cents  was  levied  upon 
every  hundred  dollars  of  income  rjceived  by  lawyers,  doctors, 
public  weiglicrs  of  cotton  and  other  products,  public  inspect- 
ors, and  pilots  '  In  1850,  after  the  state  comptroller  had 
recommended  .lU  extension  of  this  tax  to  business  incomes 
in  general,  commission  merchants  and  factors  were  made 
subject  to  a  tax  of  two  per  cent  on  their  commissions.*  In 
Florida,  however,  the  law  seems  to  have  worked  even  less 
successfully  than  in  the  other  southern  states,  and  in  1855 
the  whole  system  was  abolished." 


'  Alabama,  l.jirs  of  iS-/'!-i^ /^,  act  io6,  sees.  5,  7,  8. 
»  /..7-ci  o//S^7 -/<!/•!,  act  I,  sec.  i. 

•  /.aws  of  I S 41-)- 1  a ^o,  ait  I,  Stc.  I. 

*  I.ttwi  of  Florida,  iS./^,  c.  10,  50.  7,  anJ  c.  28,  sec.  9. 
'  /.<;:«';  of  Florida,  /-Vff),  c.  3,  5,  7. 

'  La.-i  of  FkfzJa,  .'Sjj,  e.  715,  scc.  4. 


4o6 


The  Income  Tax 


It  will  be  seen,  therefore,  that  all  these  early  attcmp.s  at 
income  taxation  were  exieedingly  crude,  and  that  in  the  south- 
ern states  they  amounted  to  very  little  more  than  a  system 
of  license  taxes.  In  no  case  was  the  revenue  at  all  significant, 
and  in  only  one  case  —  that  of  Virginia  —  was  it  even  a|)pre- 
ciable.  In  Virginia,  in  1844,  the  i'lcome  tax  yielded  about 
$i6,cxx3  out  of  a  total  state  tax  ot  5432,ooo.  Hut  of  that 
amount  almost  S 1 2,000  came  from  the  tax  on  interest.*  During 
the  fifties  the  yield  slowly  increased.  In  1853,  out  of  a  state 
tax  of  over  a  million,  the  income  tax  yielded  only  536,000. 
In  1856,  after  the  tax  rate  had  been  doubled,  the  revenue 
amounted  to  over  $99,000,  and  in  1858  it  increased  to 
5104,000.  In  the  other  states,  however,  these  figures  were 
never  approached,  although  North  Carolina  did  fairly  well. 
In  1849,  the  first  year  of  the  operation  of  the  law  in  that 
state,  the  yield  was  slightly  over  $28,000,  most  of  it  being 
derived  from  the  tax  on  interest.  In  1851  the  yield  was 
about  530,ox)  but  it  then  began  to  diminish.  Virginia  was 
virtually  thv-  unly  state  in  which  the  tax  can  be  taken  at  all 

seriously. 

» 

§  3.    The  Period  of  the  Civil  War 

When  the  Civil  War  broke  out,  the  southern  states  found 
themselves  in  a  grave  predicament.  Practically  none  of  them 
had  developed  the  system  of  the  general  property  tax  as 
it  was  found  in  the  North,  and  it  was  felt  to  be  entirely  out 
of  the  question  to  expect  that  the  burdens  of  the  impend- 
ing conflict  should  be  borne  entirely  by  the  owners  of  real 
estate  and  slaves.  What,  therefore,  was  done  in  a  compara- 
tively easy  way  in  the  North,  through  a  simple  increase  in  the 
rate  of  the  general  property  tax,  it  was  necessary  to  accom- 
plish in  a  different  way  in  the  non-industrial  South,  where  the 
capital  invested  in  industry  was  exceedingly  small.  The  South, 
th^  efore,  was  compelled  to  turn  primarily  to  the  commercial 
and  professional  classes,  and  had  to  make  use  of  an  income 

'  Auditor's  Kifcrt,  Xovcmbcr  :u,  1S45. 


State  Income  Taxes 


407 


tax  rather  than  a  pnjpcrty  t.v.x.     This  movement  soon  became 
well-nifjh  universal  throiit^hoiit  the  South. 

In  Virfjinia,  where,  as  we  remember,  there  had  been  since 
the  forties  a  kind  of  partial  income  tax,  the  real  change  took 
place  in  1862.  In  1 861,  indeed,  the  old  progressive  salaries  tax 
wns  replaced  by  a  low  proportional  tax  of  one  per  cent  on  the 
,  iount  in  excess  (jf  five  hundred  dollars  ;*  but  in  1862,  after 
the  war  had  broken  out,  comprehensive  changes  were  made, 
chiefly  in  the  rates  of  the  existing  tax.''  In  1863,  however, 
not  alone  were  the  raies  still  further  increased,  so  that  s,.iaries 
and  fees  paid  two  and  one-half  per  cent,  and  interest  of  bonds 
and  income  from  toll-bridges  and  ferries  paid  seventeen  per 
cent,  but  a  tax  of  ten  per  cent  was  now  levied  upon  the  in- 
come received  from  any  licensed  trade,  business,  f)r  occupa- 
tion, from  the  use  of  money  by  others,  from  the  exchange  of 
any  kind  of  proi)erty,  and  from  any  other  trade  or  specula- 
tion.^ The  amount  of  three  thousand  dollars  was  exempt  in 
all  cases ;  and  there  were  additional  exemptions  in  the  case 
of  certain  profits  from  property  to  be  used  by  the  purchaser 
and  from  the  sale  of  cattle  or  farm  produce  on  the  part  of 
the  farmer. 

This  system  continued  until  1866,  when  a  new  .system  was 
introduced,  including  a  general  pnjperty  tax  as  well  as  license 
taxes  and  a  tax  on  incomes.  Incomes  were  now  subjected  to 
an  elaborate  classification  in  six  categories,  and  salaries  were 
separately  assessed  in  a  distinct  schedule.  The  rates  varied 
from  one  and  one-half  to  three  per  cent,  according  to  the 
different  classes  of  income.^  In  1867  the  rates  were  changed 
so  as  to  vary  from  one  to  five  per  cent.'  In  1870,  however, 
all  the  schedules  and  classes  were  abolished,  and  a  general 
tax  of  two  and  one-half  per  cent  was  imposed  on  the  amount 

'  Virginia,  .li!s  of  Gen^rjl  A  -fmhly,  i%i.<i,  c.  I,  sec.  lo. 

'  Ihe  rate  upon  salarie<  an  i  fees  wa.s  increascrl  one  anl  one-half  per  crnt;  the 
rate  upon  interest  from  b  ,n  is  an!  from  purchases  to  ten  per  cent. — La'.tt  of 
Ctneral  Asstmhly,  tSbl-l%f;J,  c.  I,  sec.  9. 

^  A<ti  of  Giner.il  Aaemhh ,  iS/-'  f,  p.  I . 

*  Acts  of  Gtnfril  As;emHy,  iS'<j;-iS66,  c.  3,  sees.  8  et  sej. 


I 


4o8 


Tfu  Income   Tax 


I 


of  incomes  in  excess  of  filtccii  iuindrctl  dollars,  while  the 
conihinctl  license  and  income  tax  upon  protessionul  classes 
was  converted  into  a  pure  license  tax.'  Incometi  were  de- 
fined so  as  to  comprise  certain  specified  itemi^  toj^ctho'  wit*' 
"all  other  Rains  ami  profits  derived  from  any  other  source 
whatever,"  and  deiluctions  were  granted  for  losses  by  fraud 
or  shipwreck,  losses  incurred  in  trade,  sums  paid  for  ferti- 
lizers, labor,  or  service,  except  the  outlay  for  im|)rovcnicMls, 
new  buildings,  and  betterments.  In  iS/t  the  excnii)tion  was 
reduced  to  one  thousand  dollars,  and  the  rate  to  one  and  one- 
half  per  cent.'  In  1872  some  minor  changes  were  made,  and 
in  1874  the  exemption  was  lowered  to  six  hundred  dollars 
and  the  definition  of  income  was  somewhat  altered.''  In  this 
form  the  Civil  War  income  tax  has  continued  to  exist,  with 
only  slight  modittcitions,  to  the  present  lime. 

During  the  war  the  tax  yielded  substantial  revenues.  In 
1863  the  proceeds  amounted  to  $178,945,  of  which  ?():?, 780 
was  due  to  the  ten-jier-cent  tax  on  profits.  As  soon,  how- 
ever, as  the  war  was  over,  and  the  law  was  changed  in  1866, 
the  yield  decreased  greatly,  amounting  in  1866  to  only  about 
$23,000.  The  revenue  thereafter  remained  at  an  insignificant 
figure.  In  1873,  for  instance,  the  income  tax  yielded  only 
$33,140  out  of  a  state  tax  of  $2,268,000.* 

In  North  Carolina,  where,  as  we  remember,  the  old  tax, 
dating  from  the  forties,  was  in  existence  at  the  outbreak  of 
the  Civil  War  at  the  rate  of  four  i)er  cent,  the  law  of  1861 
modified  the  system  to  some  extent  by  repealing  the  exemp- 
tion of  judges  from  the  tax,  and  by  increasing  the  rate  of  tax 
upon  toll  roads,  bridges,  and  ferries  to  two  and  one-half  per 
cent.'*  In  1863,  however,  when  the  general  exemption  in  the 
case  of  salaries  and  fees  was  raised  to  one  thousand  dollars, 
the  tax  on  profits  was  extended   and  modified,  and  various 

*  Virginia,  Aeti  of  General  Assembly,  iSbo-iSyo,  c.  226. 
-  Alls  1/  (l/neral  Aise  >:Hy,  iSyo-tS-;/,  t.  193,  sec.  7. 

■■'  Alts  of  Cenerat  AssemHy,  1  ■<■;/,  c.  240,  sec.  loy. 

*  Cf.  the  figures  qunted  in  Kinsman,  of.  itl ,  p.  56. 

•^  North  Carolina,  /.nifs  of' i\6t.  Se,nn,i  I  xira  Stssicft   c.  •!!. 


ilii? 


w^m. 


li^JLi:;.- 


Stale  hicomc   Taxi  409 

classes  of  incomes  were  tiixcil  :it  diffirciit  rales.  Tims  ten 
per  cunt  was  levied  on  the  ineoine  dI  all  Ijrokers  and 
bankers;  ten  to  twenty  per  (cnt  on  the  i>rtit)ts  of  liijuor 
dealers;  two  per  tent  on  the  prolits  of  money  or  i  apitul  in- 
vested in  certain  nKuuilaLlures  and  ( (innnodities ;  and  five 
per  cent  on  the  profits  derived  from  the  pure  hase  and  sale  of 
articles  imported  into  the  state  from  neutral  port>.'     In    1864 


certajn  speciMed  prolessions  and  occu|iations  were  taxed  at 
the  rate  of  two  and  one-half  per  cent,  "and  all  otlu-r  persons 
whose  fees,  wages,  per(|uisites,  salaries  and  cniokmients  "  ex- 
ceeded one  thousand  dollars  were  taxed  one  jier  cent.''^  The 
tax  on  the  prohts  (d  '.ertain  maniitacturers  was  now  made 
progressive,  the  rate  ranj^inf^  from  live  to  filtein  per  cent.'' 
In  1865  certain  tnim^r  changes  were  made.  In  1X66,  how- 
ever, all  ir>.i.oiiu.s  excejit  those  from  s.iiariis  and  fees  were 
taxed  according  to  a  iTogres^ive  >i  .ile  from  one  to  three  and 
one-half  percent.  In  1867  the  progression  was  materially  re- 
duced, and  in  1869  the  income  tax  was  again  made  [iropor- 
tional,  at  the  rate  ot  two  and  onohalf  per  cent,'  I-'iii ally,  in 
1870,  the  rate  was  reduced  to  one  and  <jne-half  |)er  cent,  and 
in  that  shape  it  continued  for  a  number  of  y.ars. 

The  income  tax  in  North  Carolina  never  worked  well. 
While  it  was  (jf  some  heli)  during  the  Civil  War,  the  total 
yield  of  the  tax  in  fSG;  wis  ou^y  ??8^9,  and  by  1877  it 
had  fallen  to  51685,  out  of  :i  total  state  tax  ot  >495,542, 
only  28  out  of  94  counties  in  the  st  iLe  making  any  returns 
at  ail.'' 

In  South  Carolina,  where  it  will  be  remembered  that  the 
old  faculty  tax  had  coiitin-i  jd  virtually  unth.anged  from  tlie 
eight'cnth  i.entury.  the  law  ot  f86i  provided  a  tax  cjf  one  jjcr 
cent  upon  all  incomes  fr^.^m  "  factorage,  employment,  faculties 
and  professions,"  as  well  as  upcni  commissions  from  ail  corn- 


it- 


^  North  c'ar   iina.  1 1-' :  ■''"/   '  ',  }>:^ul~ir  .'.--    ?  n,  ■  .  ^v. 
-  /.i-.r:  •:■'  r'  ;.     .  27,  1  h-   ] -!'■  .\.  -:   .  70. 
'  V  -x  il'.'a;'-,  see  ■-••ii^':nan.  />•    ■>'    r  '   7  .rifin,  2\  el.,  j 
•  1'   r    '••-;'.-.  ■•■••  i ';".■',       107,  an  i  Kin-man,    //.  .1/.,  [..  Uy. 
"  .  tuJlUr'.  liiKrt  I:  r  J    7:. 


u/,. 


4IO 


The  Income  Tax 


f 


mission  n.erchants  and  c^'mmercial  agents,  and  upon  all  sala- 
ries over  five  hundred  dollars.*  In  1865  the  t:.x  upon  salaries 
and  wages  was  dropped,  and  the  tax  on  profits  extended  to 
"persons  engaged  in  inland  navigation  or  operating  steam 
saw-mills,  hotel  and  boarding-house  keepers,  bar-rooms  and 
lime  and  charcoal  burners."^  In  1866  the  tax  was  extended 
to  all  incomes,  including  rents.^  But  when  the  new  constitu- 
tion was  adopted  in  1868,  the  dissatisfaction  was  such  that 
the  taxation  of  incomes  was  completely  abandoned. 

In  addition  to  Virginia,  North  Carolina,  and  South  Carolina, 
Alabama  was  the  only  state  to  continue,  with  some  modifica- 
tions, its  existing  taxation  of  incomes.  In  1862  a  tax  of  five 
per  cent  was  levied  upon  the  net  profits  received  from  certain 
specified  businesses  which  include'l  virtually  all  the  occupa- 
tions in  the  state,*  and  the  few  classes  which  had  not  been 
enumerated  wcrr.  now  taxe  I  by  a  law  of  the  following  year." 
In  both  cases  it  was  provided,  however,  that  the  capital  it»- 
vested  in  any  business  whose  profits  were  taxed  should  be  ex- 
empt. After  various  changts  in  rates,  the  law  of  1866  was 
made  in  terms  a  general  income  tax,  by  a  provision  that  a  tax 
of  one  per  cent  should  be  imposed  on  "  the  annual  gains, 
profits,  salaries  and  income  in  excess  of  five  hundred  dollars  re- 
ceived by  any  person  within  the  state."  ^  In  1867  the  exemp- 
tion was  raised  to  one  thousand  dollars,  and  in  1868  the  rate 
was  made  three-fourths  of  one  per  cent. 

After  the  war  was  over,  the  tax  continued  with  certain 
minor  changes;  but  its  administration  went  from  bad  to 
worse.  The  revenue  accordingly  became  ludicrously  small. 
In  1870  it  amounted  to  about  gii.ocx)  out  of  a  total  state  tax 
of  ^1,122,000.  The  proceeds  then  frradualiy  diminished  until, 
in  1879,  it  yielded  only  $8 too.  During  the  next  four  or  five 
years  the  revenue  was  a  little  larger,  but  the  prejudice  against 
the  tax  grew  considerably.     Tiie  tax,  although  only  sporadi- 


>  South  Carolina,  Laxvs  of  iS(u,  p.  837. 
2  l.a-vs  of  iS(>-f-/S6=;,  p.  231. 
*  Alabama,  laws  of  1S63,  act  I,  sec.  10. 
"  Imws  ofiSbj,  act  8j,  sec.  2. 


'  Laws  of  tSbt,  p.  395. 

«  La-Jii  of  iSts-iSbb,  act  I,  c.  I. 


1 


^i^m^^m;^m^^mM^mmfmm^:^ALtM^mm^^: 


State  Income  Taxes 


411 


cally  levied,  had  become  exceedingly  unpopular,  and  in  1883 
the  auditor  reported  as  follows:  "Taxes  upon  salaries, 
gains,  incomes  and  profits  are  regarded  with  disfavor  by  al- 
most every  taxpayer.  .  .  .  They  are  in  the  very  nature  of 
things  attained  by  processes  inquisitorial  in  character,  and 
therefore  to  most  persons  exceedingly  obnoxious.  In  addition 
to  this  the  law  has  never  been  and  probably  never  will  be 
properly  e.xecuted,  and  consequently  does  not  bear  equally 
alike  upon  all.  ...  I  do  not  hesitate  therefore  to  give  it  as  my 
opinion  that  it  should  be  repealed. " »  Asa  result  of  this  recom- 
mendation the  provisions  for  the  levying  of  the  income  tax 
were  dropped  from  the  statutes,  so  that  the  tax  came  to  an 
end  in  1884. 

In  addition  to  the  four  southern  states  which  utilized  their 
old  income  tax  during  the  Civil  War,  a  number  of  other 
states  now  introduced  it  for  the  first  time.  The  most  remark- 
able example,  perhaps,  is  that  of  Georgia,  for  that  state  not 
only  levied  an  income  tax  in  1863,  but  introduced  the  pro- 
gressive principle.  It  was  indeed  not  a  general  income  tax, 
in  that  it  was  limited  to  profits,  but  the  rate  on  large  profits 
was  absurdly  high.  According  to  the  law  of  1863,2  if  the 
income  was  twenty  per  cent  of  the  capital,  the  tax  was  one- 
half  of  one  per  cent ;  if  the  income  was  twenty  to  thirty  per 
cent  of  the  capital,  the  tax  was  one  and  one-half  per  cent ; 
and  for  every  increase  of  ten  per  cent  in  the  percentage  of 
profits  to  capital,  the  rate  increased  one-half  of  one  per  cent 
ad  infinitum.  The  result  was  that  when  the  profits  equalled 
the  capital  invested,  the  rate  would  be  five  per  cent,  and  if 
the  profits  were  ten  times  the  capital,  the  entire  profits  would 
go  as  taxes.  It  actually  hapj)ened  that  with  the  deprecia- 
tion of  paper  money  several  people  made  nominal  profits  on  a 


•».; 


*  Auditor's  Report,  /SHj,  p.  17. 

»  Georf^a  laws  of  iS6j,  Extra  Session,  title  18,  sec.  156.  Cf.,  for  the  experi- 
ence  of  Georgia,  Stligman.  I'rofressire  ■J\,.uiti„n,  Yy..  105  else,/..-  Kinsman,  op. 
(it.,  pp.  93  et  seq.;  an.l  a  special  article  by  William  A.  Shclton,  "Che  Income 
Tax  in  Georgia,"  in  the  Journal  0/  roliticai  Economy,  vol.  xviii  (1910),  pp. 
610-627. 


■II 


I 

i  1 


n 


1 

it 


i  ! 
it 


1 


i( 


412 


T/ie  Income  Tax 


small  capital  at  these  higher  rates,,  and  were  thus  assessed 
at  practically  all  of  their  profits.'  In  1863  the  law  was 
changed,  making  the  tax  rate  proportional  to  the  amount, 
instead  of  to  the  percentage,  of  the  income,  and  several 
minor  changes  were  made  in  the  next  few  years.  The  act 
yielded  some  revenue  during  the  war,  although  not  to  any 
appreciable  extent.^  Far  from  being  a  success,  as  we  are 
sometimes  told,''  the  law  was  both  unsuccessful  and  exceed- 
ingly unpopular.  The  Comptroller  General,  in  1864,  for 
instance,  stated:  "I  am  free  to  confess  that  ...  I  h.ve 
felt  satisfied  that  there  has  been  so  much  fraud  and  hard 
swearing,  or  to  say  the  least  of  it,  so  many  different  opinions 
relative  to  income  tax  returns,  I  have  but  little  partiality  for 
the  system.  So  far  as  my  observation  extends,  only  a  few 
whose  business  was  such  that  they  could  not  hide>  if  they 
would,  have  paid  most  of  this  tax.  .  .  .  The  real  sharper,  or 
monopolizer,  and  speculator  who  does  no  regular  business, 
but  buys  up  produce,  etc.,  and  holds  it  up  for  high  prices, 
gets  off  by  dodging  the  receiver,  or  by  claiming  to  have 
made  no  profits  above  eight  per  cent."  *  As  soon  as  the  war 
was  over,  protests  poured  in  upon  the  legislature,  and  the  tax 
was  soon  dropped.  Instead,  therefore,  of  being  an  unprece- 
dented success,  the  Georgia  income  tax  may  be  declared  to 
have  been  an  almost  unqualified  failure. 

In  addition  to  Georgia,  experiments  were  made  with  the 
income  tax  also  in  a  few  other  southern  and  border  states. 
Missouri  introduced  a  partial  income  tax  in   1861,  the   law 

1  See  the  amusing  instanc!:  of  the  brewer,  mentioned  in  Seligman,  op.  cil.,  p. 
105,  note  17. 

'  Kinsman,  o/<.  cit.,  p.  96,  gives  the  yield  of  the  tax  in  1863  as  $683,235.  j\» 
Shclton,  liowevcr,  points  out,  op.  (it.,  p.  626,  this  is  doubly  erroneous.  In  the  lirst 
place,  the  figures  ^iven  are  those  of  returns,  not  of  receipts;  in  the  second  place, 
Kinsman  failed  to  notice  the  point  that  the  lijjures  wire  calculateil  in  the  depre- 
ciated  Confederate   money.     The   actual   yield   of  the   tax  in   gold   wai   only 

S33.  •90- 

'  jVs,  for  instance,  by  Kinsman,  who  speaks  (o/.  cit.,  p.  654)  of  the  "  unprec- 
edented success  of  the  law."  Kinsman  was  led  astray  by  the  mistake  referred 
to  in  the  last  note. 

*  Report  of  the  Comptroller  General  of  Georgia,  1864,  p.  36. 


State  Income   Taxes 


413 


providing  for  a  tax  of  thirty-two  cents  on  each  hundred 
dollars  of  income  from  all  salaries  over  eight  hundred  dollars 
and  from  stocks  and  other  property  not  taxed  in  the  state.' 
In  1864  both  the  exemption  and  the  rate  were  lowered, 
and  in  1865  the  old  exemption  was  repealed.  With  the 
close  of  the  war,  however,  Missouri's  experiment  came  to 
an  end. 

Texas  levied  a  tax  in  i860  on  salaries  of  over  five  hundred 
dollars,^  and  alsp  imposed  a  license  tax,  which  in  a  certain 
sense  included  incomes.  In  1866,  however,  following  a  rec- 
ommendation from  the  governor,  who  declared  that  the  tax 
upon  professions  operated  very  oppres.sively  and  unequally, 
the  legislature  imposed  a  general  income  tax  upon  every 
person  doing  business  within  the  state,  the  tax  being  gradu- 
ated from  one  to  three  per  cent,  according  to  the  amount  of 
income.  The  tax  on  business  incomes,  hov  ver,  included 
incomes  from  securities.  There  was  joined  to  this  general 
tax  on  business  incomes  a  tax  on  salaries.  The  law  worked 
so  badly  that  in  1870  the  income  tax  was  confined  to  the 
interest  from  bonds,^  and  even  that  was  allo\\cd  to  lapse  the 
following  year. 

In  Louisiana  the  income  tax  was  not  introduced  until  1864, 
when  a  law  was  enacted  providing  for  a  tax  of  one-quarter  of 
one  per  cent  on  all  incomes  in  excess  of  two  thousand  dollars 
from  any  "trade,  profession  or  occupation.'"'  With  some 
modifications,"  the  Louisiana  law  continued  to  the  end  of  the 
century  ;  but  ;ts  efficiency  was  quite  negligible.  In  1868,  for 
instance,  the  tax  yielded  $2476  out  of  a  total  state  tax  of  over 
$508,000;'  and  in  1899  the  proceeds  were  exactly  %voi,? 
Since  then  it  appears  not  to  have  been  levied. 

Two  of  the  border  states  also  experimented  with  the 
income   tax.     In    West   Virginia,  which,  as   is  well  known, 

1  Missouri,  La-,fz  of  rS6o-/S()/,  Rrj^ular  Se::iou,  u.  62. 

2  Texas,  /m-ls  ff  iSbt,  c.  53.  sec.  3.  a  la-w^  0/ iSjo,  c.  X4,  sec.  32. 
*  Louisiana,  /.azi-s  0/ /864,  act  55,  sec,  j. 

•These  arc  <Ies..ri'>e  I  in  Kinsman,  'A  .(/.,  p.  loi. 

»  AuJitcr's  /<e;orlfjr  tS6S.  '  AltJUur':  Ke^'irl  jar  iS()q. 


I 


414 


Tlie  Income  Tax 


I    I 


adopted  most  of  the  existing  laws  of  the  parent  state,  an 
act  of  1863  introduced  the  Virginia  income  tax  law,^  but  it 
seems  never  to  have  been  enforced.  Finally,  in  Kentucky,  a 
law  of  1867  imposed  a  partial  income  tax,  confining  it  to  the 
income  from  United  States  bonds,  and  for  a  few  years 
yielded  considerable  revenue.*  In  1872,  however,  the  law 
was  declared  unconstitutional.^ 

If  we  sum  up  the  history  of  the  Civil  War  period,  we  may 
say  that  in  only  a  few  cases  was  a  general,  income  tax  im- 
posed, and  that  in  all  cases,  with  the  possible  exception  of 
Virginia,  the  tax,  after  the  first  ardor  of  war  enthusiasm 
had  subsided,  worked  exceedingly  badly.  The  administration 
was  inefficient,  the  revenue  was  ludicrously  small,  and  the 
tax  in  most  cases  became  a  farce.  As  a  consequence,  it  was, 
with  a  few  exceptions,  allowed  to  lapse  after  the  close  of  the 
war. 

§  4.    The  Recent  History  of  State  Income  Taxes 

The  fourth  movement  in  the  direction  of  the  state  taxation 
of  income  dates  from  the  period  of  the  early  nineties,  and 
especially  after  the  federal  income  tax  of  1894  had  been 
declared  unconstitutional.  It  was  during  these  years  that  an 
attempt  was  made  to  revive  the  old  Civil  War  income  tax  in 
Virginia  and  North  Carolina,  and  that  an  income  tax  was 
reintroduced  on  newer  lines  in  South  Carolina.  In  these 
three  states,  as  well  as  in  Massachusetts,  with  its  survival  of 
the  old  faculty  tax,  the  income  tax  accordingly  is  still  found 
to-day ;  and  to  these  four  states  there  must  now  be  added 
Oklahoma. 

In  Virginia  the  income  tax  of  the  Civil  War  period  con- 
tinued, as  we  have  learned,*  during  the  seventies  and  eighties, 
with  slight  modifications,  and  with  the  same  poor  success.  In 
1898,  however,  the  law  now  in  force  was  enacted.^    The  tax 

*  Laws  of  It^fst  Virginia,  /S6^iS6j,  o.  64,  sec.  8. 
2  Laws  of  Kentucky,  iSb-j,  vol.  i,  ch.  183a. 
»  9  Bush,  p.  46.  «  Supra,  p.  407. 

'  Acts  of  Central  Assembly,  iSgy-iSc)%,  c.  496. 


■IP 


State  Income  Taxes  415 

is  imposed  upon  all  incomes  in  excess  of  six  hundred  dollars, 
and  income  is  defined  as  including  "  all  rents,  salaries,  inter- 
est upon  notes,  bonds  or  other  evidences  of  debt,  ...  the 
amount  of  all  premiums  on  gold,  silver  or  coupons,  the 
amount  of  sales  of  live-stock  and  meats  less  the  value 
assessed  thereon  the  previous  year,  the  amount  of  sales  of 
wrool,  butter,  cheese,  hay,  tobacco,  grain,  vegetable  or  other 
production  grown  or  produced  by  said  person  during  the 
preceding  year,  .  .  .  less  all  sums  paid  for  taxes  and  for 
labor,  fences,  fertilizers,  clover  or  other  seed  purchased  or 
used  upon  the  land  .  .  .  ;  all  other  gains  and  profits  .  .  .  ," 
with  a  deduction  for  losses.  The  assessor  is  required  to  list 
ai:  such  incomes,  except  that  the  tax  on  the  salaries  of  state 
officials  is  to  be  collected  at  the  time  of  payment  by  the 
state.  The  rate  of  taxation  is  one  per  cent.  The  care  taken 
in  the  enactment  of  this  law  may  be  inferred  from  the  reten- 
tion of  the  now  unmeaning  words  "the  amount  of  premiums 
on  gold,"  etc. 

For  a  long  time  the  yield  of  the  income  tax  in  Virginia 
varied  between  thirty  and  fifty  thousand  dollars  as  over 
against  a  state  revenue  of  about  two  millions.  During  the 
last  few  years  the  yield  has  somewhat  increased,  and  in  the 
year  1908  it  reached  <S  122.047.1  Since  then,  however,  it  has 
again  considerably  diminished  being  only  slightly  more 
than  a  hundred  thousand  dollars  in  1909  and  1910.2  Not 
only  is  such  a  sum  insignificant,  but  in  over  thirty  per  cent 

»  Annual  Report  of  the  Auditor  of  Public  Accounts  for  igoS,  p.  2. 
*  The  yield  for  the  last  tin  years  has  been  as  follows :  — 

«90' ?46,023 

'902 59,2i;2 

"^^3 60.J57 

«y04 ()4,7Sl 

"905 70,954 

'906 77,414 

•907 94.291 

•  9oS 122.0 

1909 102,810 

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The  Income  Tax 


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of  the  counties  of  the  state  the  income  tax  is  never  collected 

at  all. 

Virginia  is  the  only  state  in  which  any  appreciable  income 
is  derived  from  the  income  tax.  In  North  Carolina,  where, 
as  we  know,  the  Civil  War  income  tax  also  continued,  the 
principle  of  differentiation  was  introduced  in  1887,  with  a 
rate  of  one-half  of  one  per  cent  on  salaries  and  one  per  cent 
on  income  from  property.i  In  1893,  however,  the  principle 
of  progression  was  reintroduced,  and  that  of  differentiation 
was  extended.2  In  1895  and  1897  the  rates  were  slightly 
changed,  and  remained  in  force  until  1907.  According  to 
the  system  at  that  time  the  income  from  salaries  and  fees 
was  taxed  at  the  rate  of  one-half  of  one  per  cent  on  the  excess 
over  one  thousand  dollars.  All  profits  on  incomes  derived  from 
property  not  taxed  paid  five  per  cent,  while  all  other  incomes 
were  taxed  according  to  the  following  schedule :  — 

Incomes  from  81,000  to  $5,000  paid  }  of  one  per  cent. 
Incomes  from     5.000  to  10.000  paid  J  of  one  per  cent. 
Incomts  from  10,000  to  20,000  paid  i  per  cent. 
Incomes    in   excess  of  20,000  paid  2  per  cent. 

In  1 90 1,  however,  the  rate  was  again  made  proportional 
In  1905  the  law  was  changed  in  several  respects,  and  secrecy 
was  now  imposed  on  the  officials.  The  law  of  1905  was 
virtually  reenacted  in  1907  and  1909,  and  at  present  the 
tax  is  imposed  at  the  rate  of  one  per  cent  on  all  gross  in- 
comes over  $icxx),  excluding  incomes  from  property  already 
taxed.' 

The  yield  during  the  nineties  was  ludicrous  in  the  extreme, 
ranging  from  about  $2000  to  $4500  annually.  During  the 
first  decade  of  the  twentieth  century  a  slight  improvement 
has  taken  place,  owing  largely  to  an  effort  of  the  new  state 
tax  commission,  so  that  in  the  year  1909  the  income  tax 
produced  $37,490  as  over  against  a  revenue  of  more  than 

'  North  Carolina,  I.mvs  of /S87,  c.  135,  sec.  5. 
-  /i7-ws  o/jSq-,  c.  116,  schedule  A,  sec.  5. 
5  AevtHuc  All  of  ic)og,  sees.  22-25. 


State  Income  Taxa 


417 


^986,000  from  the  general  property  tax.'     But  even  thus  the 
income  tax  is  little  more  than  a  farce. 

In  South  Carolina,  where,  as  wc  remember,  the  Civil  War 
income  tax  had  been  allowed  to  lapse,  the  income  tax  was 
reintroduced  in  1897,  but  now  with  a  progressive  scale.  The 
tax  was  a  general  income  tax,  at  the  following  rates  :  — 

Incomes  from  82,500  to  f  5,000  paid  i    per  cent. 

Incomes  from  5,000  to     7,500  paid  i\  jjcr  cent. 

Incomes  from  7.500  to  15,000  paid  2    percent. 

Incomes  of  15,000  and  over   paid  3    per  cent. 

This  law  al.so  has,  until  recently,  been  a  complete  failure. 
The  yield  for  the  years  1900,  1901  and  1902  was  respectively 
$97S<  $609,  and  $292.  Beginning  in  1905,  however,  a  more 
energetic  attempt  has  been  made  to  enforce  the  law,  with  the 
result  that  the  revenue  has  slowly  increased,  although  with 
the  most  remarkable  variations  from  year  to  ycar.^  The 
Comptroller  General,  in  one  of  his  recent  reports,  tells  us  that 
he  has  "made  earnest  efforts  to  enforce  the  provisions  of  the 
law."  But  he  adds,  "  the  enforcement  of  the  law  has,  as  a 
matter  of  fact,  been  incomplete.  Much  dissatisfaction  and 
opposition  is  shown  to  it  by  many  who  are  liable  for  the  tax, 
because  they  see  others  escape  from  its  payment.  Many 
persons  have  refused  to  make  a  return  of  their  income,  de- 
claring the  act  imposing  the  tax  unconstitutional.  The  law 
should  be  impartially  enforced,  or  else  repealed."  ^ 

1  The  figures  for  recent  years,  as  given  in  the  Ke^orts  »f  the  Stale  .  lui/itor  of 
Xorth  Carolina,  are  as  follows:  — 

'90' Si9,030.79       190O 531,292.82 

'902 19,022.48       1907 36,829.44 

'903 23.50977       lyo'^ 3<'.383.25 

'904 24.589.04      19C9 37.490.18 

•905 27,844.13 

*  The  yield  uf  the  income  tax  since  1905  has  been  as  follows :  — 

•905 82,130       1908 f8,43l 

1906 12,201       1909 16,236 

1907 10,687 

^  Heport  of  the  ComptroiUr  General  for  the  fiscal    Yt-ar    ii)oq,     Columbia, 
I910,  p.  24. 


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418 


T/ie  Income   Tax 


Outside  of  the  three  southern  states,  into  the  administrative 
features  of  whose  system  it  is  not  worth  while  to  enter,  the 
income  tax  is  found  to-day  only  in  Massachusetts  and  Okla- 
homa. The  situation  in  Massachusetts  has  been  portrayed 
above.  In  Oklahoma  a  so-called  professional  income  tax  was 
imposed  in  1008  ^  on  all  incomes  from  salaries,  fees,  profes- 
sions, and  property,  in  excess  of  ^3500,  upon  which  a  gross- 
receipts  or  excise  tax  "^  has  not  been  paid.  The  rates  are  as 
follows:  — 

5  mills  (J  of  I  "/,)  on  the  excess  over  $3-50o  "P  'o  JS-o^o- 

7'.  mills  (X  of  I  %)  on  the  excess  over  $5,000  up  to  f  10,000. 

12  mills        (1.2%)  on  the  excess  over  $io,ooo  up  to  $20,000. 

15  mills        (1-5%)  on  the  excess  over  $20,000  up  to  $50,000. 

20  mills           (2%)  on  the  excess  over  $50,000  up  to  $100,000. 

33i  mills         (3i%)  on  all  amounts  over  $100,000. 

Every  taxpayer  is  required  to  sign  a  certificate  of  his 
income.  The  assessor  in  the  township  is  to  send  to  the 
state  auditor  lists  of  income  recipients  who  have  not  filled 
out  the  blanks.  The  auditor  may  then  take  such  steps  as 
he  deems  necessary  to  require  any  such  person  to  make 
proper  returns  of  his  income,  and  he  may  also  summon  wit- 
nesses. The  efficacy  of  all  these  provisions  seems  to  be 
doubtful,  for  in  1909  the  returns  made  by  the  county  clerks 
amounted  to  only  $2816.8 

§  5.    The  Outlook  for  the  Future 

From  the  preceding  survey  it  will  be  seen  how  utterly 
insignificant  and  unsuccessful  have  been  the  experiments  with 
state  income  taxation  in  the  United  States.  Under  the 
stress  of  modern  conditions  the  old  faculty  tax  of  the  eigh- 

1  Oklahoma,  Session  Laws,  iqoy-igo^,  c.  8l,  art.  lo. 

2  The  gross-rcccipls  tax  rcferreil  to  is  the  so-called  "Gross  Revenue  Tax"  of 
lyoS,  imposed  on  the  gross-receipts  of  all  public-service  corporations,  mining  cor- 
porations, and  petroleum  and  natural  gas  cmpanies,  with  rates  varying  from  one- 
(|uarter  of  one  per  cent  to  three  per  tent.  Oklahoma,  Session  Laws  of  igoj- 
tgoS,  c.  71,  art.  2.     The  law  is  now  heinj;  tested  in  the  courts. 

-  Annual  i<e[->rt  of  :hc  Si^ie  AuUtirr  cf  OUuhc'rhl,  igog,  p.  73. 


"TSa 


State  Income  Taxes 


419 


tcenth  century  died  away  everywhere  except  in  Massachusetts, 
where  it  still  lingers  as  a  shadow  of  its  former  self.  In  the 
northern  and  middle  states  no  serious  attempt  was  ever  made 
to  impose  an  income  tax,  as  sufficient  difficulty  was  experienced 
in  enforcing  the  property  tax.  In  the  southern  states  the 
absence  of  a  property  tax  led,  as  we  have  seen,  in  the  forties, 
to  an  unsuccessful  endeavor  to  introduce  income  taxes.  The 
only  experiment  which  deserves  to  be  called  even  a  half-way 
notable  one  was  made  by  the  southern  states  during  the  Civil 
War.  The  income  tax  as  it  exists  to-day  in  the  American 
commonwealths  does  not  merit  serious  consideration. 

More  and  more  it  has  been  realized  by  state  officials  and 
commissions  that  any  hojjc  of  a  satisfactory  state  income  tax 
is  illusory.  As  far  back  as  1889  the  special  tax  commission 
of  Maine  reported  as  follows :  "  Many  theorists  advocate  an 
income  tax  as  the  fairest  form  of  taxation.  In  theory  there  is 
much  to  sustain  it.  In  practice  it  is  almost  universally  a 
failure.  In  theory  it  seems  just  that  a  person  should  be 
taxed  upon  the  net  yield  of  his  occupation  or  investments  as 
the  best  gauge  of  his  taxable  ability,  but  in  the  levying  of 
such  a  tax  it  has  always  been  found  that  art,  subterfuge, 
evasion,  and  downright  perjury  have  rendered  the  system  in- 
efficient and  futile.  To  tax  capital  property,  lands,  and  also 
the  income  arising  from  their  employment,  is  intolerable  as 
double  taxation;  to  exempt  such  property  and  rely  upon  the 
income  from  them  alone  leaves  open  a  hundred  ways  for 
evasion,  and  is  open  to  grave  objections.  It  has  been 
tried  in  several  states,  but  has  proved  unsatisfactory  in  all, 
and  it  is  a  potent  argument  against  this  form  of  taxation  that 
in  the  efforts  that  have  been  made  in  most  states  of  the 
Union  during  the  past  ten  years,  to  find  new  sources  of 
revenue,  there  has  been  so  little  disposition  to  resort  to  income 
taxes." ' 

A  few  years  later  a  New  York  report  stated  "  that  an  in- 
come tax  upon  all  incomes  over  a  fixed  sum  could  be  readily 
collected  and  would  be  fair  and  equitable  as  insisted  upon  by 

'  Report  of  the  Sptti^u  l<i.\  L\'iii»iisiion  of  Mutiie,  iSHt/.    Auyuata,  linyo.p.  j6. 


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T/te  Income  Tax 


many  political  economists.  .  .  .  But  in  view  of  the  objections 
made  to  the  income  tax  .  .  .  and  a  feeling;  on  the  part  of 
the  public  that  such  a  tax  is  inquisitorial  and  contrary  to 
the  spirit  of  republican  institutions,  such  a  tax  at  this  time 
seems  to  be  quite  inadmissible,  whatever  be  its  merits."  '  In 
Massachusetts,  as  we  have  seen  above,^  the  commission  of 
1897  came  to  a  similar  conclusion  as  to  the  inadvisability  of 
any  attempt  to  revive  or  to  generalize  the  income  tax. 

No  further  efforts,  outside  of  a  few  southern  states,  were 
made  for  some  years  to  suggest  an  income  tax  for  state  pur- 
poses. In  1907,  however,  the  revenue  commission  of  Colo- 
rado discussed  the  subject,  and  reported  that  '*  if  we  must  tax 
incomes  from  labor  and  capital,  as  well  as  incomes  from  privi- 
leges, it  surely  is  much  better  and  less  evasive  to  tax  the  value 
of  the  products  and  privileges  direct  rather  than  to  bother 
with  their  incomes."^  They  added  "as  a  federal  tax,  .  .  .  much 
can  be  said  in  favor  of  an  income  tax ;  as  a  state  tax  it  is 
utterly  indefensible."  In  1906  the  tax  commission  of  Califor- 
nia took  up  the  matter.  It  so  happened  that  the  constitution 
of  California  specifically  permitted  income  taxes.  The  com- 
mission, however,  reported  strongly  against  any  attempt  to  in- 
troduce an  income  tax :  "  The  Commission  believes  that  it 
would  not  be  wise  to  take  advantage  of  this  section.  .  .  .  Our 
people  have  so  much  respect  for  labor  that  what  is  won  by 
honest  toil  is  regarded  as  sacred  and  not  to  be  reduced  by  di- 
rect taxation.  Sixteen  states  have  tried  the  income  tax.  In 
every  case  it  was  a  failure,  being  evaded,  disliked,  laxly  en- 
forced, and  yielding  small  returns."  * 

A  fuller  discussion  of  the  subject  is  found  in  the  report 
of  the  special  tax  commission  of  New  York  of  the  following 
year.    In  New  York,  \.'here  the  fifteen  members  of  the  commis- 

1  Report  of  Counsel  to  revise  the  Tax  Laws  of  the  State  of  Xew  York,  iSgj, 
Albany,  1893,  p.  7. 

»  Supra,  p.  397. 

'  Report  of  the  Revenue  Commission  of  Colorado .     Denver,  1907,  p.  18. 

*  Report  of  the  Commission  on  Revenue  and  Taxation  of  the  State  of  Call' 
forma,  11)06.     Sacramento,  1906,  p.  14. 


State  Income   Taxes 


421 


sion  agreed  upon  certain  general  recommendations,  two  mem- 
bers brought  in  a  supplemental  report  in  favor  of  a  graduated 
lump-sum  state  income  tax.  This  proposition  was  voted  down 
in  general  committee,  and  the  argument  against  it  was  pre- 
sented as  a  supplemental  report  by  a  few  members.  As  the 
present  writer  was  the  authi)r  of  that  report,  we  may  be  par- 
doned for  inserting  in  this  place  an  extract  therefrom.' 

"The  income  tax  is  indeed  an  admirable  tax  in  abstract 
theory,  but  we  feel  convinced  that  it  will  not  work  in  practice 
in  New  York.  The  general  property  tax  is  also  defensible  in 
theory,  but  it  has  been  found  not  to  work  in  practice  under 
American  conditions.  In  the  body  of  the  report,  the  personal 
property  tax  is  termed  ineffectual,  and  therefore  inequitable. 
The  same  would,  in  our  opinion,  be  true  of  the  income  tax. 
It  would  not  work  well  in  practice,  and  whatever  fails  to  work 
in  practice  is  indefensible  as  a  legislative  proposition.  In  fact, 
it  is  easier  to  levy  a  personal  property  tax  than  it  is  to  levy  an 
income  tax ;  for  some  personal  property  at  all  events  is  tan- 
gible and  visible,  while  no  part  of  income  is  ever  tangible  or 
visible.  The  income  tax  has  been  tried  in  many  of  the  Amer- 
ican States,  and  now  exists  in  several  commonwealths.  It 
has  always  been  a  dismal  failure.  What  rea.son  is  there  for 
supposing  that  what  has  always  been  a  failure  will  at  once  be- 
come a  success.'  The  reason  of  the  failure  is  to  be  found  in 
the  economic  and  political  conditions  of  American  life.  Those 
conditions  cannot  be  changed  by  law.  They  are  the  same 
conditions  which  have  made  the  personal  property  tax  a 
failure. 

"The  second  objection  is  that  which  is  due  to  interstate 
complications.  The  income  tax  theory  assumes  that  all  the 
people  subject  to  the  tax  secure  their  ircome  in  the  state,  and 
that  all  people  receiving  an  income  in  the  state  live  in  the 
state.  Both  assumptions  are  illegitimate.  A  man  may  live  in 
New  York  and  get  his  income  from  ail  over  the  country ;  or 
a  man  may  get  his  income  from  New  York  sources  and  li"e 

'  Report  of  the  Special  Tax  Commission  of  tht  State  of  Nrj>  York.  Albany, 
1907,  pp.  46  tt  seq. 


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The  Income  Tax 


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elsewhere.  Any  attempt  to  legislate  for  the  whole  country 
by  a  New  York  law  must  inevitably  fail. 

"  Suppose,  for  instance,  that  a  resident  of  another  state 
happens  to  spend  several  months  in  New  York  on  a  pleas- 
ure trip.  According  to  the  scheme  suggested,  he  would  be 
subject  to  a  tax  on  his  entire  income,  irrespective  of  the 
question  whether  he  was  already  being  taxed  on  his  income 
or  on  his  personal  property  in  the  state  of  his  residence. 
This  would  create  an  intolenable  situation.  Moreover,  a 
man  might  carry  on  his  business  through  agents  in  New 
York  City,  and  might  live  in  New  Jersey  or  Rhode  Island 
and  thus  completely  escape  taxation.  Instances  of  these 
interstate  complications  might  be  multiplied  indefinitely  and 
would  show  how  impossible  it  would  be  to  reach  any  uni- 
formity of  burden  by  making  the  income  tax  a  state  or  local 
tax.  Economic  and  business  life  in  the  United  States  has 
become  a  national  life ;  it  has  transcended  state  boundaries. 
Any  attempt  by  a  single  state  to  run  against  this  current  is 
doomed  to  f?.ilure. 

"The  third  objection  is  that  of  practical  inequality.  So  far 
as  the  tax  would  work  at  all,  it  would,  in  the  opinion  of  your 
Commissioners,  work  spasmodically  and  would  produce  in- 
justice. The  rich  man  would  stand  from  under,  ?.  he  does 
at  present  with  the  personal  property  tax,  especially  in  those 
states  which  have  a  listing  system.  Either  he  would  live 
without  the  state  and  conduct  his  business  here  through 
agents,  or  he  would  so  arrange  his  affairs  as  to  secure  most 
of  his  income  from  extra-state  sources  which  could  not  be 
reached  and  which  could  be  so  manipul.ited  as  not  to  show  in 
his  books.  While  the  aim  of  the  law  would  be  to  press  less 
hardly  upon  the  moderate  and  fairly  well-to  do  class,  the 
practical  result  would  be,  in  our  opinion,  to  impose  the 
burden  upon  these  very  sections  of  the  community,  and  to 
exempt  the  wealthier  clas.ses  who  can  afford  to  employ  the 
most  astute  legal  talent  to  aid  them  in  evading  the  law.  The 
tax  would  seek  to  secure  equality  ;  it  would  result  in  crass  in- 
equality. 


Slate  Income   Taxes 


423 


"The  fourth  objection  is  that  an  income  tax  of  the  kind 
recommended  would  lead  to  corruption.  As  is  well  known, 
there  are  two  methods  of  levying'  an  income  tax.  The  one 
i.s  to  asse.ss  the  recipients  of  the  income  directly  upon  their 
entire  income.  This  is  sometimes  called  the  lump-su.  In- 
come ta.\.  The  other  method  is  to  assess  the  tax,  not  upon 
the  person  -ho  receives  the  income,  but  upon  the  perse  .i  who 
pays  the  income,  thus  deducting  the  tax  Trom  the  amounts 
payable  to  the  income  receiver.  This  is  sometimes  called 
the  stoppage-at-source  income  tax.  .  .  .  The  income  tax  bill 
discussed  by  our  colleagues  proposes  to  reintroduce  the  dis- 
credited methods  which  have  never  worked  well  in  Anglo- 
Saxon  countries  and  which  have  been  abandoned  u.,  far  as 
possible  in  Kngland.  No  one  who  is  at  all  acquainted  with 
the  administrative  conditions  in  the  United  States  or  with  the 
difference  as  between  Germany  and  America  in  the  attitude 
of  the  average  citizen  to  the  administration  can  entertain 
much  doubt  that  German  methods  are  inaiiplicable  in  this 
country.  We  feel  that  the  only  result  of  levying  such  a 
direct  income  tax,  resting  on  the  listing  of  all  incomes  by  the 
taxpayers,  would  be  pre-isely  as  in  the  ca.se  of  a  rigorous  per- 
sonal-property tax,  to  increase,  not  equality,  but  perjury  and 
corftiption.  The  law  would  either  remain  a  dead  letter,  as  is 
the  case  in  most  of  the  American  states  where  the  income  tax 
is  now  imposed,  or  it  would  tend  to  create  illicit  bargains  be- 
tween the  taxpayers  and  the  assessors,  as  is  now  the  case  in 
almost  every  state  of  this  country  where  the  listing  system 
has  been  introduced  and  where  great  power  is  given  to  the 
assessors  in  connection  with  the  tax  on  personal  property. 

"The  rich  experienceof  the  United  -States  showsconclusively 
that  an  income  tax  of  the  kind  recommended  by  our  colleagues 
would  be  ineffective.  Kven  the  national  income  tax,  during 
the  Civil  War,  was  a  notorious  offender  in  this  respect. 
The  state  income  taxes  which  are  found  at  the  present  time 
are  mere  farces,  and  there  is,  in  our  opinion,  no  reason  to 
expect  much  better  results  in  New  Yor^  Human  nature  is 
about  the  same  in  New  Vork  as  it  is  evc' /where  else. 


■(! 


'■I 

i 


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I 


H'l 


ri 


424 


TAe  Income  Tax 


"  While  there  is,  in  our  opinion,  no  doubt  as  to  the  inadvis- 
ability  of  an  income  tax  of  the  kind  recommended  by  our 
colleagues,  the  question  arises  whether  a  different  method  of 
levying  and  administering  the  income  tax  might  not  remove 
most  of  the  above  objections.  As  an  abstract  proposition, 
again,  we  do  indeed  believe  that  a  stoppage-at-source  income 
tax  as  employed  at  the  present  time  in  England  is  far  pref- 
erable to  the  lump-sum  income  tax  discussed  by  our  col- 
leagues. PZven  the  adoption  of  the  English  system,  however, 
would  not,  in  our  opinion,  completely  remove  the  objections  to 
an  income  tax. 

Our  chief  doubt  arises  from  the  fact  that  the  English  sys- 
tem is  not  applicable  to  American  conditions  within  the 
separate  states.  In  England  almost  every  one  who  receives 
dividends  or  interest  on  his  securities,  domestic  or  foreign, 
receives  them  through  a  banker,  who  is  compelled  to  make 
returns  to  the  income-tax  board.  In  America  a  man  keeps 
his  securities  in  safe  deposit  vaults,  cuts  off  his  coupons  and 
deposits  them  for  collection  in  a  bank,  which  is,  as  often  as 
not,  situated  in  another  state.  Bonds,  moreover,  are  not 
usually  registered  in  the  name  of  the  owner,  so  that  it  would 
be  almost  impossible  for  a  bank  or  an  agency  to  know  whether 
the  person  who  has  so  deposited  the  coupons  is  the  ownA-  or 
the  assignee.  Moreover,  to  the  extent  that  a  man's  income 
is  derived  from  foreign  corporations  —  and  tiie  great  mass  of 
New  York  incomes  is  derived  in  that  way  —  it  would  be  im- 
practicable to  reach  the  foreign  agencies  or  organizations,  for 
a  state  income  tax  could  not  apply  to  extra-state  corporations. 
In  short,  looked  at  from  any  point  of  view,  the  whole  system 
of  stoppage  at  source,  as  applied  to  its  most  important  point, 
namely,  the  income  from  intangible  securities,  would  break 
down  almost  completely,  except  in  so  far  as  New  York  cor- 
porations are  concerned.  It  is  easy  to  see  that  the  probable 
result  of  such  a  law  would  be  to  transfer  investments  to 
foreign  corporations.  .  ,  . 

"  In  short,  we  incline  to  the  opinion  that  even  if  the  income 
tax  is  iidvisable   at   all,  it  is  advisable  at  present  only  as  a 


1*1 


State  Income  Taxes 


425 


federal  tax.  As  long  as  New  York  is  surrounded  by  common- 
wealths which  seek  to  attract  to  themselves  much  of  the  wealth 
of  their  rival,  it  is  unreasonable  to  expect  a  development  of 
interstate  comity  in  taxation  which  would  redound  to  their 
disadvantage.  Such  an  interstate  comity  can  probably  be 
forced  upon  the  American  commonwealths  only  from  above ; 
and  it  is  a  debatable  question  whether  the  national  govern- 
ment has  the  constitutional  power  to  do  this.  At  all  events, 
for  New  York  State  to  act  independently  in  this  matter  would 
be,  in  our  opinion,  highly  inexpedient. 

"  We,  therefore,  conclude  that  any  form  of  state  income  tax 
is  at  present  inadvisable.  Some  of  the  undersigned  were 
years  ago  in  favor  of  such  a  scheme,  but  a  closer  acquaintance 
with  the  administrative  and  economic  conditions  of  American 
life  has  forced  them  to  the  conclusion  that  a  state  income  tax 
would  be  a  failure.  The  project  is  beautiful  in  fiscal  theory, 
but  useless       actual  practice.  .  .  . 

"  Whatever  may  be  the  situation  in  future  years,  your  Com- 
missioners are  convincca  that  to  advance  the  project  of  a 
direct  state  income  tax  at  the  present  time  is  an  iridescent 
dream.  The  scheme  might  succeed  in  bringing  in  some 
revenue,  but  it  would,  in  our  opinion,  be  sure  to  bring  in  its 
train  inequality,  fraud  and  corruption.  Far  from  being  a 
remedy  for  our  present  evils  it  would  only  accentuate  those 
evils. 

"  It  is  for  these  reasons  that  we  consider  the  imposition  at 
the  present  time  of  a  direct  state  income  tax  inexpedient  and 
inadvisable." 

§  6.    Conclusion 

In  the  face  of  the  contentions  reproduced  in  the  last  section 
it  would  seem  reasonably  certain  that  whatever  may  be  the 
future  of  the  income  tax  in  the  United  States,  it  has  no  pros- 
pects as  a  state  income  tax.  In  this  conclusion  almost  all 
serious  students  agree.  Mr.  Kinsman,  the  author  of  a  spe- 
cial study  on  the  subject,  maintains  that  "the  experience  of 
the  states  with  the  income  tax  warrants  the  conclusion  that 


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426 


T/te  Income  Tax 


the  tax,  as  employed  by  them,  has  been  unquestionably  a 
failure;  "*  and  he  adds  that  "a  careful  study  of  the  history 
of  the  tax  leads  one  to  the  conclusion  that  the  failure  has 
been  due  to  the  administration  of  the  laws.  The  causes 
operating  to  oroduce  this  failure  in  administration  appear  to 
have  been  four :  the  laws  themselves  have  been  defective  in 
the  provisions  for  their  own  administration  ;  the  officials  have 
been  lax  in  the  enforcement  of  the  laws  ;  the  taxpayers  have 
been  persistent  in  evading  them  ;  and  the  nature  of  some  in- 
comes has  made  them  especially  difficult  to  reach."*  His 
conclusion  is  that  "the  tax  cannot  be  successful  so  long  as 
taxpayers  desirou3  of  evading  taxation  are  given  the  right  of 
self-assessment.  Since  all  attempts  to  change  the  method  of 
self-assessment  have  failed,  and  the  nature  of  industry  in  the 
United  States  is  at  present  such  as  to  make  impossible  the 
assessment  of  a  general  income  tax  at  the  source,  we  are 
forced  to  the  conclusic  that  even  though  no  constitutional 
question  should  arise,  failure  will  continue  to  accompany  the 
tax  until  our  industrial  system  takes  on  such  form  as  to  make 
possible  the  use  of  some  method  other  than  self-assessment."^ 

While  all  the  defects  mentioned  by  Mr.  Kinsman  are 
undeniably  true  he  does  not,  in  our  opinion,  touch  the  real 
difficulty  of  the  situation.  Even  though  the  objections  upon 
which  he  lays  the  chief  stress  were  removed,  and  the  use  of 
some  other  method  than  self-assessment  wen,-  introduced,  the 
income  tax  would  still  be  impracticable  as  a  state  tax.  For  it  is 
not  so  much  the  method  of  assessment  as  the  impossibility  of 
localizing  income  which  will  continue  to  make  the  income  tax 
unworkable  for  state  or  local  purposes.  This  is  the  point 
that  is  generally  overlooked  by  the  few  advocates  of  a  state 
income  tax  that  we  still  find. 

When  at  the  first  national  conference  on  state  and  local 
taxation  in  1907  some  enthusiast  recommended  a  state  income 
tax  as  a  way  out  of  the  difficulties  connected  with  the  state 
taxation  of  personal  property,  the  point  was  clearly  put  by  a 
representative  from  the  state  of  Washington :  "  I  think  we 

'  6)/.  <'/,  p.  116.  *  O/.  <•(■/.,  p.  117.  •  O/.  a/.,  p.  121. 


:•)  * 


State  Income  Taxes  427 

will  all  agree  that  the  income  tax  would  be  a  correct  measure 
of  taxation;  but  I  should  also  like  to  ask  the  gentleman  to 
outline  his  plan  of  machinery  to  put  the  income  tax  into  oper- 
ation.    I  have  thought  about  it  a  great  deal;  I  have  tried  to 
plan  out  machinery  for  its  operation,  and  I  have  not  been  able 
to  devise  the  first  wheel  of  a  machine  to  put  it  into  successful 
operation.     If  any  gentleman  here  has  evolved  any  plan  I 
should  greatly  like  to  hear  of  it."  1     No  one  was  able  to  help 
him;  and  another  speaker,  Dr.  Millis,  agreed  that  "state  and 
local  income  ta.xes  are  not  at  present  practicable  measures."  2 
At  the  third  conference  the  scholar  who  had  originally  been 
in  favor  of  a  state  income   tax  declared   his  conversion    to 
a  federal  income  tax.3    At  the  fourth  conference  attention 
was  called  to  the  fact  that  a  constitutional  amendment  had 
been  adopted  in  Wisconsin  permitting  the  legislature  to  enact 
an  income  tax,  and  Professor  T.  S.  Adams  read  a  paper  in 
favor  of  such  a  scheme.*     When  reduced  to  the  last  analysis, 
however,  his  argument  was  that  an  income  tax  could  succeed 
as  a  state  ta.\,  provided  that  the  whole  .system  of  fiscal  admin- 
istration be  revolutionized.^     But  this  is  precisely  what  is  not 
to  be  expected.     If  the  tax  on  personal  property  is  a  farce 
because  of  bad  administration,  how  can  any  one  confidently 
assume  that   the   mere  imposition  of  an  income  tax  would 
bring  with  it  a  revolution  in  administration.     If  the  adminis- 

>  State MnJ Local  Taxation.  Fint  National  Conference,  imJer  the  Auspices  of 
the  National  J  ax  Conference.  Addresses  and  Proceedings.  .\c'.v  Yurk,  1908, 
pp.  261-262. 

'^  Ibid.,  p.  445. 

•''  Trofessor  Kapcr  of  Xnrth  Carolina.  (/  .St,!/e  and  Local  Ta.xation.  Third 
International  Conference,  tinder  the  Auspices  of  the  International  Tax  Associa- 
tion.    Addresses  and  Proceed! njrs,     Cuhmihus,  I'do,  p.  245. 

♦  State  and  local  laxation.  loiirih  International  Conference,  under  the 
Auspices  of  the  Inlernalicnal  Tax  Association.  Addresses  and  Proceedings. 
Culumbus,  1911,  pi>.  87  et  sei/. 

'•>  "  It  ouUl  be  maclL  perfectly  apparent  to  tliem  [the  people  of  Wisconsin] 
that  an  income  tax  without  reconstruction  of  the  assessment  machiii.rv  wimld  be 
an  absurility.  I  beli.ve  that  in  .ir.lcr  to  get  the  income  tax  they  woul.l  consent  to 
rcorgani/e  the  machinery  of  assesjnient."  —  ('/.  cif.,  ]..  95.  Austria  and  Italy  also 
"consented  to  reorganize  the  machinery  of  assessment,"  and  we  know  the  results! 


Hi 


I": 


If 


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111 


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428 


The  Income  Tax 


\  Vi'i 


i  <.• 


tration  can  be  revolutionized,  let  us  apply  the  revolution  to  our 
present  methods.  We  should  rather  concur  in  the  opinion  of 
the  Wiscopsin  Tax  Commission  that  "it  does  not  seem  reason- 
able to  expect  any  better  enforcement  of  the  income  tax  than 
of  the  general  prop'  ty  tax,  left  to  local  enforcement.  .  .  . 
The  experience  with  the  income  tax  in  the  United  States  has 
not  been  such  as  to  commend  it  under  the  practice  adopted 
for  its  enforcement."^  But  even  if  the  tax  should  be  assessed 
by  state  officials  rather  than  by  local  officials,  the  situation 
would  not  be  materially  different,  as  we  have  pointed  out 
above.  We  can  heartily  indorse  the  conclusion  of  the  com- 
mission that  "Americans,  in  ca'-e  of  dissatisfaction  with  either 
the  law  or  its  ar^.-inistration,  are  prone  to  ask  for  further 
legislation,  rather  tiian  for  stricter  enforcement,  the  new  law 
again  being  left  on  the  statute  books  to  rest  in  sweet  for- 
getfulness."  As  the  experience  of  Switzerland  has  clearly 
shown,'  and  as  sound  theory  would  in  itself  teach,  an  income 
tax  is  more  difficult  of  administration  than  a  personal-prop- 
erty tax,  for  the  reason  that  personal  property  is  in  part,  at 
least,  tangible,  while  income  is  always  necessarily  intangible. 
Furthermore,  to  quote  the  example  of  the  Gorman  state  income 
taxes  in  support  of  an  American  state  income  tax  is,  as  we 
have  pointed  out  above,'  beside  the  mark,  for  in  Germany 
there  exists  an  imperia'  law  governing  the  whole  subject  of 
interstate  double  taxation  which  it  would  be  hopeless  to 
expect  in  this  country. 

A  state  income  tax,  therefore,  would  work  just  as  badly  as,  and 
in  our  opinion  even  more  badly  than,  the  present  personal-prop- 
erty tax.  The  real  difficulty  in  the  one  case  as  in  the  other  is 
not  with  administrative  methods,  but  with  the  inherent  im- 
possibility of  localizing  personalty  or  income.  The  history  of 
Great  Britain  has  shown  us  the  fatuity  of  a  local  income  tax; 
the  experience  of  Switzerland  has  shown  us  the  futility  of  a 
state  income  tax.  In  a  country  like  the  United  States,  where 
the  basis  of  economic  life  has  become  national,  and  where  the 

'  Fourth  liitnnial  Rtport  of  Wisnomin  Tax  Commission.  Madison,  1909, 
f.  i/.  -   '■'•'/''f?,  p.  3'-'  *  S»fr,7,  p,  270, 


State  Income   Taxes 


429 


income  of  taxpayers  has  almost  universally  far  transcended 
state  lines,  any  attempt  to  construct  a  successful  state  income 
tax  is  well-nigh  hopeless.  To  elaborate  any  form  of  income 
tax  in  the  United  States  is,  as  we  shall  sec  in  the  succeeding 
chapters,  difficult  enough ;  to  multiply  these  difficulties  need- 
lessly and  to  make  a  hard  task  doubly  hard  would  indeed  be 
the  reverse  of  wisdom.  Whatever  may  be  the  future  of  tax 
reform  in  the  American  commonwealths,  it  is  not  likely  that 
an  income  tax  will  be  one  of  its  permanent  features.  In  the 
agricultural  states,  an  income  tax  is  not  apt  to  succeed,  be- 
cause farmers'  incomes  are  proverbially  refractory ;  in  the 
developed  industrial  states  an  income  tax  is  not  apt  to  suc- 
ceed because  of  the  national  scope  of  large  business  incomes. 
Consequently,  if  an  income  tax  is  to  be  utilized  at  all  in  the 
United  States,  it  must  be  as  a  national  income  tax.  To  a  con- 
sideration of  the  national  taxation  of  income  we  shall  accord- 
ingly now  address  ourselves. 


iff    ■ 


i 

I; 

;   ill 


CHAPTER   III 


The  Civil  War  Income  Tax 


§  I.    The  Origin  of  the  Tax 

The  first  suggestion  of  a  federal  income  tax  *  was  made  in 
January,  1815,  by  Secretary  Dallas.'  As  a  so-called  direct  tax 
on  lands  and  slaves  was  already  in  existence,  Dallas,  like  virtu- 
ally everybody  else  at  the  time,^  assumed  that  this  suggested 
income  tax  would  not  be  one  of  the  direct  taxes  contemplated 
by  the  constitution.  Had  the  war  lasted  a  few  months  longer 
there  is  every  probability  that  an  income  tax  would  have 
been  imposed,  but  the  conclusion  of  peace  made  any  further 
resort  to  internal  taxes  unnecessary,  and  two  years  later  the 
whole  system  of  internal  revenue  was  abolished. 

It  was  not  until  the  outbreak  of  the  Civil  War  that  the 
government  again  resorted  to  the  system".  On  July  4,  1861, 
Secretary  Chase  made  a  report  in  which  he  suggested  that  a 

'  A  short  account  of  the  Civil  War  income  tax  will  be  found  in  F.  C.  Howe, 
"  Federal  Revenues  and  the  Income  Tax,"  in  Annals  of  the  Ameriian  Aciu/eniy 
of  Political  and  Social  Science,  vol.  iv  (1894),  pp.  64  et  seq.,  and  in  the  same 
author's  Taxation  in  the  United  States  under  the  Internal  Kereniie  Sntem,  New 
York,  n.  d.  [1896];  and  in  an  oftkial  return  entitled  Income  Tax,  prepared  by 
Henry  H.  Smith,  the  .\ssistant  Register  of  the  United  States,  and  published  in 
November,  1893.  A  somewhat  longer  account  will  be  found  in  an  article  by 
J.  A.  Hill,  in  the  Quarterly  Journal  of  Economics,  vol.  viii  (1894),  pp.  416  et  seq. 
.■\mong  the  contemporary  works  menti  jn  may  be  made  of  tj.  S.  Boutwell,  Man- 
ual of  Direct  and  Excise  Tax  System  in  the  United  Stales,  1S63;  the  works  of 
Bump  and  of  Estee  mentioned  infra,  p.  469  ;  and  manuals  like  The  Taxpayer's 
Manual,  The  Taxpayers'  and  Assessors'  Guide,  published  from  1862  to  1872. 

""Special  Report  on  the  State  of  the  Finances,  January  17,  i?<i  ly,"  \n  American 
State  Papers,  vol.  vi  (iS^j),  pp.  885-887.  Dallas,  after  suggesting  a  tax  on  in- 
heritances, a  tax  on  wheat  flour,  and  a  tax  on  bank  dividends,  added  that  "an 
income  tax  may  be  easily  made  to  produce  three  millions." 

'  The  committee  on  ways  and  means,  in  reporting  adversely  a  bill  to  tax  cer- 
tain incomes,  in  Dec.  1814,  assumed  that  it  was  not  a  direct  tax.  See  op.  cit., 
P-  873- 

430 


The  Civil  War  Income  Tax 


431 


small  part  -not  to  exceed  twenty  millions  — of  the  required 
revenue  be  raised  by  direct  taxes  or  internal  duties  or  excises, 
or  both.  Following  his  suggestion,  Stevens,  the  chairman  of 
the  committee  of  ways  and  means,  introduced,  on  July  24,  a 
bill  providing  for  a  direct  tax  and  certain  internal  duties.* 
The  direct  tax  suggested  was  modelled  upon  that  of  18 13. 
It  was  to  amount  to  thirty  millions,  the  quotas  expected  from 
the  loyal  states  being  put  at  twenty  millions.  The  introduc- 
tion of  the  bill  led  to  a  heated  discussion.  Conkling  spoke  of 
the  obnoxious  features  of  the  law,  and  proposed  in  its  stead  a 
system  of  requisitions  on  the  states.  Stevens  conceded  that 
the  bill  was  a  most  unpleasant  one,  but  contended  that  Con- 
gress must  choose  "  between  these  disagreeable  duties,"  since 
"the  annihilation  of  this  government  is  the  alternative."'* 

As  the  discussion  in  the  House  proceeded,  it  was  manifest 
that  the  chief  objections  to  the  scheme  consisted  in  the  fact 
that  it  was  confined  to  real  estate,  and  that  the  constitu- 
tional method  of  levying  the  tax  by  apportionment  would 
result  in  crass  inequality,  bearing  with  especial  rigor  upon 
the  western  states.  Colfax,  for  instance,  stated  that  "  the 
most  odious  tax  of  all  we  can  levy  is  going  to  be  the  tax  upon 
the  land  of  the  country."  ^  And  in  reply  to  the  plea  of 
urgent  necessity  he  said  :  "  There  is  no  stress  of  weather  which 
can  induce  me  to  vote  for  the  bill  as  it  now  stands.  I  cannot 
go  home  and  tell  my  constitutcnts  that  I  voted  for  a  bill  that 
would  allow  a  man,  a  millionnaire,  who  has  put  his  entire 
property  into  stock,  to  be  exempt  fr^^m  ta.xation,  while  a  farmer 
who  lives  by  his  side  must  pay  a  tax."  McClerland  pointed 
out  that  it  would  fall  "  with  very  heavy,  if  not  ruinous,  effect 
upon  the  great  agricultural  states  of  the  West  and  Southwest," 
and  Arnold  called  attention  to  the  inequality  that  would 
ensue  as  between  Massachusetts  and  Illinois.*  Stevens, 
however,  replied  that  a  direct  tax  under  the  constitution  is 
necessarily  a  tax  upon  real  estate,  and  Bingham  agreed  that 

*  Tht  Congrtnioiial  Globe,  jyth  Congress,  First  Session.  Washington,  1861, 
P  246. 

■-■  Op.  cit.,  p.  247.  '  0/    .  lA,  p.  24S.  ^  Up.  ill.,  p.  325. 


m 


ii: 


&ial 


432 


The  Income  Tax 


the  uniform  construction  of  the  constitutional  provision  had 
been  "that  the  power  to  levy  and  apportion  direct  taxes 
could  be  rightfully  applied  only  to  lands  and  slaves."  >  As 
a  consequence  of  this  position,  Colfax  now  proposed  that  the 
direct  tax  clause  be  stricken  out,  and  that  a  provision  be  made 
for  a  tax  on  stocks,  bonds,  mortgages,  money,  and  interest, 
as  well  as  for  an  income  tax.  Pike  supported  this  motion  in 
a  strong  speech.  Referring  to  the  disproportion  of  population 
and  wealth  as  between  Rhode  Island  and  Kansas,  he  said :  "  It 
is  unfair  to  levy  such  a  tax  when  we  have  the  ready  and  fair 
way  of  raising  that  sum  by  an  income  tax  upon  real  and  per- 
sonal estate."'  The  bill  was  accordingly  recommitted,  with 
instructions  to  arrange  for  taxing  something  else  besides 
lands.  On  the  next  day  the  chairman  of  the  committee 
reported  they  were  "  unable  to  devise  any  provision  that  will 
be  constitutional  which  would  carry  into  effect  the  instructions 
of  the  house."  ^  This  led  to  another  important  discussion  in 
which  the  old  arguments  were  repeated.  Bingham  pointed 
out  that  while  incomes  could  indeed  not  be  taxed  under  the 
direct-tax  clause  of  the  constitution,  they  could  be  taxed  as 
duties  or  excises.* 

On  the  following  day  after  Edgerton  had  stated  that  "  a 
more  odious  bill  cannot  be  devised"  than  this  tax  on  farmers,^ 
Edwards  made  a  strong  plea  for  the  income  tax.  Speaking 
of  the  scheme  to  tax  all  property  rather  thru  lands,  he  said: 
"  We  can  tax  it  in  some  mode  if  we  cannot  impose  on  it  what 
is  technically  called  a  '  direct  tax.'  If  so,  why  should  we  not 
do  it?  Why  should  we  stickle  about  terms  .'  Why  should  we 
not  impose  the  burdens  which  are  to  fall  upon  the  people  of 
this  country  equally,  in  proportion  to  their  ability  to  bear 

1  He  added :  "  I  undertake  to  say  that  the  uniform  construction  of  that  clause 
of  the  constitution  is  this:  that  under  the  head  of  direct  taxation,  as  provided  for 
in  the  const  tion,  to  be  apportioned  among  the  several  states,  according  to  the 
ratio  of  representation,  there  is  nothing  to  be  taxed  except  land,  tenements,  and 
slaves  as  appurtenant  to  land,  unless  it  be  a  direct  capitation  tax  on  the  person, 
without  respect  to  his  property  or  to  his  income."  —  Op  cit.,  p.  249. 

»  O*.  cii.,  D.  21:2.  *  Op.  at.,  p.  272. 


op. 
•  Op.  cit.,  p.  a68. 


Op.cit^^  a&2. 


^msf 


The  Civil  War  Income  Tax 


433 


them  ?"  '  Wyckliffe  contended  that  the  direct-tax  bill  was 
"  unjust  in  its  main  principles  "  because  it  proposed  "  to  impose 
a  tax  upon  a  great  interest  of  the  country  least  able  to  bear  it  at 
this  time,"  '  and  moved  an  amendment  that  personal  property 
should  be  included.  After  some  discussion,  this  amendment 
was  adopted  by  a  majority  of  over  two-thirds."  Accordingly, 
the  committee  reported  the  bill  back  with  a  substitute  reducing 
the  amount  to  be  raised  by  the  direct  tax  from  thirty  to- twenty 
millions,  and  providing  for  a  tax  of  three  per  cent  on  all  incomes 
over  six  hundred  dollars  a  year.*  Morrill  stated  that  the  in- 
come tax  was  to  be  distinguished  from  the  direct  or  land  tax, 
and  pointed  out  that  personal  property  could  not  be  constitu- 
tionally reached  by  the  methods  of  the  direct  tax.  "  The  in- 
direct or  income  tax  which  is  to  be  raised  by  this  bill  will  be, 
in  my  judgment,  at  least  twice  as  much  as  what  we  shall 
raise  by  direct  taxation."  ^  With  these  explanations  the  bill 
was  passed  on  July  29  by  a  vote  of  "j-j  to  60. 

In  the  meantime  the  matter  had  been  taken  up  in  the  Sen- 
ate. Simmons,  the  chairman  of  the  finance  committee,  in- 
troduced on  July  25  the  tariff  bill  which  had  passed  the  House 
a  few  days  earlier."^  He  moved  to  strike  out  all  after  the  en- 
acting clause  and  insert  a  substitute  which  he  now  proceeded 
to  explain.  Instead  of  proposing  a  direct  tax,  he  held  that  the 
new  import  duties  had  better  be  supplemented  by  an  income 
tax.  "  Let  us  tax  property  in  the  last  resort,  when  we  have 
to  reach  the  poor  as  well  as  the  rich,  people  of  small  means 
as  well  as  those  who  have  large ;  but  I  do  not  believe  this 
country  has  come  to  a  pass  to  be  driven  to  a  resource  of  such 
extreme  measures.  I  think,  with  what  we  can  collect  by  a 
moderate  duty  on  importations  and  a  moderate  tax  on  incomes 
exceeding  one  thousand  dollars,  we  can  meet  all  the  exigencies 
of  the  public  service,  loaded  down  as  it  will  be  by  this  wicked 
rebellion!"^      Fessenden  agreed,  stating:    "I  am  inclined 


m\ 


m 
b 


■fi. 

If 
t     ' 


t 


»  dp.  .it.,  p.  283. 

'^  ()/.  .;/.,  p.  ,;oi. 
a  Op.  at.,  p.  30K. 


'  LP. 


Of.  .//.,  p.  254. 


*  Op.  cit.,  p.  323. 
^  Op.  at.,  p.  330. 
"  Op.  cit.,  p.  205. 


1 


«^7al^E^SStS7tfc*jl 


434 


The  Income  Tax 


very  much  to  favor  the  idt-p  of  a  tax  upon  incomes  for  the  rea- 
son that,  taking  both  measures  together,  I  believe  the  burdens 
will  be  more  equalized  on  all  classes  of  the  community,  more 
especially  on  those  who  are  able  to  bear  thorn.  "  •  On  July 
29  Simmons  reverted  to  the  matter.  Referring  to  the  rule  of 
the  Hritish  Parliament,  formed  under  some  "  mysterious  "  and 
"  inexplicable  "  influence  to  lay  "  first  imposts,  then  excises, 
then  land  taxes,  and  then  income  taxes,"  he  declared  :  "  I  am 
perfectly  satisfied,  that  there  is  no  propriety  in  our  putting  a 
land  tax  on.  The  very  reasons  that  induced  Kngland  to  put  a 
land  tax  on  should  induce  us  to  put  on  an  income  tax."  -  The 
committee  accordingly  suggested  a  five-pcr-cent  tax  on  all 
incomes  over  one  thousand  dollars,  with  a  lower  rate  upon 
incomes  from  government  securities  and  a  higher  rate  on 
the  income  of  citizens  residing  abroad. 

Senator  Chrk  referred  to  the  ambiguity  in  the  amendment 
because  of  the  failure  10  explain  whether  income  meant  gross 
or  net  income  ;  and  when  objection  was  taken  to  certain  other 
defects,  Simmons  stated  that  the  desire  of  the  committee  was 
simply  to  give  the  government  the  power  to  levy  the  tax,  but 
that  all  the  details  should  be  worked  out  by  the  Secretary  of 
the  Treasury  ^  The  Senate  accordingly  adopted  the  commit- 
tee's amendment,  and  after  the  appointment  of  a  committee 
of  conference,  the  law  was  enacted.  The  direct-tax  section 
was  included  as  it  had  been  passed  by  the  House,  rind  the  in- 
come tax  sections  provided  for  a  tax  of  three  per  cent  on  the 
excess  over  eight  hundred  dollars  of  the  "  annual  income  of 
every  person  residing  in  the  United  States,  whether  such  in- 
come is  derived  from  any  kind  of  property  or  from  any  pro- 
fession, trade,  employment  or  vocation  carried  on  in  the  United 
States  or  elsewhere,  or  from  any  soune  whatever."  In  the 
case  of  citizens  residing  abroad  the  rate  was  five  per  cent,  and 
in  the  case  of  income  from  securities  one  and  one-half  per 

cent.* 

From  the  above  survey  two  conclusions  stand  out  clearly. 


■-  Op.  ill.,  p.  314. 


*  Act  iif  .\ugust  5,  iWil,  t.  xK,  sec.  49. 


The  Civil  War  Income   lax 


435 


In  the  first  place,  the  income  tax  was  due  to  the  dissatisfaction 
expressed  with  the  scheme  for  a  tax  on  real  estate  only  ;  and 
in  the  second  place,  every  (lie  agreed  that  a  direc  t  tax  in  the 
constitutional  sense  denoted  only  a  tax  on  real  estate  and 
slaves  and  a  poll  tax,  and  that  the  income  tax  was  to  be  put  in 
the  category  of  indirect  axes.  It  was  for  this  reason  that 
both  houses  refused  to  insert  in  the  dircct-t.ix  law  any  provi- 
sion taxing  personalty  ;  and  that  a  separate  paragraph  was 
introduced  in  order  to  include  the  income  tax  among  the  duties 
and  excises  lev";d  by  the  internal  revenue  law.  In  fact,  it 
now  became  the  custom  to  call  the  tax  "the  income  duty." 
It  was  so  characterized  by  Morrill  in  the  Hou.se,  in  1862,'  and 
the  successive  laws  from  1862  on  specifically  describe  the  tax 
as  an  income  duty.  The  significance  of  this  will  appear  when 
we  come  in  a  later  chapter  to  discuss  its  con.stitutionality. 

« 

§  2.    The  Act  of  1862 

As  a  matter  of  fact,  the  act  of  1861  was  never  put  in  force. 
The  law  had  provided  that  the  tax  should  be  payable  on  June 
30,  1862,  but  in  the  meantime  Congress  was  to  reassei  ble. 
In  his  annual  report  in  December,  i86i.  Secretary  Chase  re- 
ferred to  the  "prudent  forecast  which  induced  Congress  to 
postpone  to  another  year  the  necessity  of  steps  for  the  practi- 
cal enforcement  of  the  law,"  and  expressed  considerable  doubt 
as  to  the  wisdom  of  so  enforcing  it.  "  The  Secretary  is  ac- 
quainted with  no  statistics  which  afford  the  means  of  a  satis- 
factory estimate  of  the  amount  likely  to  be  realized  from  the 
income  tax.  Considering,  however,  how  larj^e  a  proportion 
of  incomes,  after  the  deductions  sanctioned  b\  law,  will  fall 
within  the  exemption  limit  nf  eight  hundred  dollars  a  yr  r; 
and  considering  also  what  numerous  qu'-itions  wiii  certainly 
perplex  its  assessment  and  collection,  he  respectfully  .<  .ibmits 
whether  the  probable  revenue  affords  a  sufficient  reason  for 
putting  in  operation,  at  great  cost,  the  machinery  of  the  act, 

'  The   Concessional  Globe,  j/M    Coniyess,  _'i/  Session.     Washington,  1862 
p.  Iiy6. 


;l| 

I 

''I 


43<J 


The  In(o*ne  Tax 


with  a  view,  should  the  states  assume  the  «>ircct  tax,  t(»  ihe 
collcctiou  of  the  iucoine  tax  alone."  • 

With  his  i.foverbial  timidity  he  asked  for  only  fifty  millions 
to  be  raised  from  internal  revenue,  and  did  not  include  an  in- 
come tax.     Hut  the    ommittec  of  ways  and  moans,  who  had  a 
far  better  comprehension  of  the  necessities  of  the  situation, 
reported  the  following   March  an  internal-revenue  bill,  which 
was  not  only  to  yield  three  times  .•"•-  much  as  Secretary  Cha-e 
had  asked  for,  but  which  also  included  an  income  tax.     Mor- 
rill, as  chairman  of  the  committee,  in  reporting  the  income-tax 
bill,  said  :  "  The  income  duty  is  one,  perhap.s,  of  the  least  de- 
fensible that,  on  the  whole,  the  Committee  concluded  to  retain 
or  report.      The  objection  to  it  is  that  nearly  all  persons  will 
have  been  already  once  taxed  upon  the  sources  from  which 
their  income  has' been  derived.     There  are  few  persons  in 
this  country  who  have  any  fixed  incomes  for  a  term  ot  years. 
The  income  tax  is  an  inquisitorial  one  at  best ;  but,  upon 
looking  into  the  considerable  class  of  state  officers,  and  the 
many  thousands  who  are  employed  on  a  fi.xed  salary,  most  of 
whom  would  not  contribute  a  penny  unless  called  upon  through 
this  tax,  it  has  been  thought  best  not  to  wholly  abandon  it. 
Ought  not  men,  too,  with  large  incomes,  to  pay  more  in  pro- 
portion to  what   they  have   than  those  with  limited  means, 
who  live  by  the  work  of  their  own  hands,  or  that  of  their 
families  .>"^ 

The  introduction  of  this  bill  led  to  some  discussion,  but  al- 
most entirely  on  minor  points,  for  all  realized  that  the  need 
of  revenue  was  imperative.  On  April  3  the  question  arose 
as  to  whether  income  meant  net  income,  and  whether  profits 
and  gains  were  equivalent  to  income.-^  After  the  rejection 
of  amendments  to  provide  for  the  exemption  of  bondholders 
and  of  real  estate,  because  of  the  existence  of  the  direct  tax, 
the  bill  went  through  without  difficulty,  and  was  introduced  by 


Rtport  oftht  Stcrttiiry  of  tht  Tre,nury  for  the  year  t86i.    Washington,  iS6l, 


p.  15 


■i  Congrmional  Clohf.  i-Tt'i  CoHCress,  jJ  Stssiom,  1862,  p.  II96. 
'  c>/.  ii/.,  pp.  1531-1532. 


The  Civil  War  Income   Jax 


437 


0  assessed  only  on  the 
I    '  "s  were  due 


ill 


t, 


•11'. 


provision 
'1,  to  the 
met  his 
ty  million 
''  e  direct  tax 
11  j)endcd  for 
lich  had  been 
.though  in  a 


Pcsscnden  in  the  Senate  on  April  lo.  the  discussion  beginning 

there  in  May.     The  Senate  bill  differed  from  the  1  louse  bill  in 

that  It  retained  the  three-per-cent  rate  only  on  incomes  not  ex- 

ceeding  ten  thousand  dollars,  providing  a  five-percent  rate 

on  incomes  from  ten  to  fifteen  thousaiul  dollars,  and  a  seven- 

and-one-half.per-cent  rate  on  iiur      -s  over  fifteen  thousand 

dollars.    In  all  cases  the  incom- 

excess  over  six  hundred  dolla 

to  the  fact  that  the  Senate  hi        .i  , 

impo.sing  a  direct  tax.     J ' 

lower  rate  on  governme-      .    .]  ; 

amendment  to  levy  an  ii     i  i     .  , 

dollars.*     When  the  bil'        .-t      ; 

was  not  abandoned,  bv.     i^   ; 

two  yoars  ;  while  the  princ.   I. 

introduced  into  the  Senate  bii'  w    .> 

modified  form. 

The  law  of  1862  implied  a  comprehen.,ive  code  of  internal 
revenue  taxes,  of  which  the  income  duty  formed  only  a  part. 
In  addition  to  a  .series  of  taxes  on  the  gross  receipts  of  cer- 
tain specified  corporations,  all  railroads  were  required  to  with- 
hold and  to  pay  over  to  the  government  as  a  tax  three  per  cent 
on  the  interest  of  their  boiids  and  the  dividends  of  their  stock  ; 
and  all  banks,  trust  companies,  savings  institutions,  and  in- 
surn.pce  compani-s  were  to  pay  a  du.y  of  three  per  cent  on 
dividends,  and  on  assessme-^rs  added  to  their  surplus  or  con- 
tingent f  unds.a  A  tax  on  salaries  of  government  officials  wa^, 
imposed  at  the  rate  of  three  per  c-nt  on  incomes  o  -  s,s 
hundred  dollars,^  ana  the  paymasters  and  disbursing  01.  ■  rs 
of  the  government  were  required  lo  withhold  the  duty  at  the 
time  of  ihe  payment  of  the  salary  or  ,).iy.  The  "  incom-  duty  " 
proper  *  consisted  of  a  tax  of  tnree  pc.  cent  upon  "  the  annual 
gains,  profits  or  incomes  of  any  person  residing  in  the  United 
States,  whether  derived  from  any  kind  of  property,  rents. 
interest,  dividends,  salaries   or   from   any  profession,  trade. 

'  "A  nt.,  pp.  2441).  J574.  <  Sec.  86. 

■^  Act  of  July  I,  1S62,  chap,  cxix,  sees.  81-82.  *  Sees.  S9-93. 


tl! 

IF' 

lit 


m 


W 


if  I 
|i 

■-  it   n 


I. 


i^^ar 


438 


The  Income   Tax 


employment  or  vocation  carried  on  in  the  United  States  or 
elsewhere,  or  from  any  source  whatever,"  to  the  extent  that 
the  income  exceeded  six  hundred  dollars.  If  the  income  ex- 
ceeded ten  thousand  dollars,  the  rate  was  to  be  five  per  cent. 
In  the  case  of  citizens  residing  abroad,  the  rate  was  also  five 
per  cent,  while  in  the  case  of  income  from  government  bonds 
the  rate  was  one  and  one-half  per  cent.  In  estimating  the 
annual  gains,  profits,  or  income  subject  to  duty,  deductions 
were  allowed  for  all  other  national,  state,  and  local  taxes 
assessed  upon  the  property  or  the  source  of  income,  as  well 
as  for  all  incomes  taxable  under  the  other  sections  of  the  law. 
The  act  also  provided  that  there  should  be  deducted  "  all 
gains,  profits  or  income  derived  from  advertisements,  or  on 
any  articles  manufactured,  upon  which  specific  stamp  and  ad 
valorem  duties  shall  have  been  directly  assessed  or  paid." 
Strictly  speaking,  this  badly-drawn  provision  would  have 
meant  a  complete  exemption  for  all  business  incomes,  for 
inasmuch  as  the  tax  on  manufactured  articles  applied  to 
nearly  all  commodities,  business  income  might  be  interpreted 
as  meaning  income  derived  from  dealing  in  such  commodities. 
It  does  not  appear,  however,  that  advantage  was  taken  of 
this  c'ause,  and  all  danger  of  its  application  was  removed  by 
an  act  of  the  next  year,  which  removed  from  the  list  of  de- 
ductions the  words  "  or  on  any  articles  manufactured."  »  The 
same  amendatory  act  also  provided  that  the  amount  actually 
paid  by  any  person  for  the  rent  of  the  dwelling-house,  or  estate 
on  which  he  resided,  should  be  deducted  from  his  income. 

The  tax  was  to  be  levied  for  three  years,  beginning  July, 
1863.  Every  one  was  required  to  make  a  rctur"  of  .lis  in- 
come on  a  list  or  schedule,  to  the  assessor  or  assistant  assessor; 
and  in  case  of  neglect  or  refusal,  the  latter  was  to  assess  the 
income  at  hi?  discretion.  If  satisfied  that  the  return  was 
understated,  he  was  privileged  to  increase  the  amount  of  the 
list  or  return  ;  but  if  any  one  declared  under  oath  or  affirma- 
tion that  his  income  did  not  amount  to  six  hundred  dollars,  he 
was  to  be  exempt. 

'  .Vet  of  March  3,  1863,  c.  Ixxiv,  »ec.  I. 


The  Civil  War  Income  Tax 


439 


if 

li 


The  law  was  put  into  force  at  the  period  appointed,  but 
it  took  some  time  for  the  machinery  to  get  into  working 
order.  During  the  first  two  months  of  the  fiscal  year  of 
1 863-1 864,  for  instance,  the  yield  amounted  to  only  $172,770 
on  incomes  below  $10,000;  to  $277,461  on  incomes  above 
$10,000;  to  $1872  on  incomes  from  abroad;  and  to  $3637 
on  interest  on  bonds.*  The  commissioner  of  internal  revenue, 
in  his  report  of  December,  1863,  stated  that  "the  present  tax 
laws  on  the  whole  have  been  not  merely  endured,  but  wel- 
comed by  the  people  in  a  manner  it  is  believed  elsewhere 
unparalleled."*  He  called  attention  to  the  difficulties  con- 
nected with  the  so-called  dividends  of  life-insurance  com- 
panies, and  recommended  that  the  income  tax  be  not  levied 
upon  them.  He  suggested  only  a  few  changes  :  "This  tax," 
he  tells  us,  "  though  as  fair  in  theory  as  any  that  can  be  laid, 
has  been  found  by  the  experience  of  other  countries  to  be 
incumbered  with  practical  difficulties  in  the  assessment  which 
have  deprived  it  of  all  claims  to  public  favor.  The  people 
of  this  country  have  accepted  it  with  cheerfulness,  to  meet  a 
temporary  exigency,  and  it  has  excited  no  serious  complaint 
in  its  administration.  In  order  that  it  may  not  be  felt  to  be 
inquisitorial  in  its  character,  the  instructions  issued  by  this 
oflfice  required  that  the  returns  of  income  sha'.l  not  be  open 
to  the  inspection  of  others  than  officers  of  revenue.  Some 
doubt  having  been  entertained  whether  a  proper  consfruction 
of  the  law  sustains  the  in.structions,  I  recommend  that  the 
doubt  be  removed  by  express  enactment."  ^  The  commis- 
sioner also  recommended  that  the  pro\ision  allowing  a  deduc- 
tion for  rent  paid  for  dwelling  houses  be  stricken  from  the 
law,  and  that  owners  of  such  houses,  residing  in  t'lem,  be 
charged  with  their  rental  value  as  incom'?.  rurthermore,  he 
recommended  a  decided  increase  in  the  scaie  of  graduation, 
declaring  himself  in  favor  of  taxing  incomes  from  S5000  to 
510,000  at  four  per  cent,  from  Sio.ooo  to  $20,000  at  five  per 

'  Report  ot  the  Commxsiiciier  of  !iilfnutl  Revenue  for  Ike  V,  ,ir  eitiiing  June  jo, 
iS6j.     \Va>liiiiKti'n,  1S64,  jip.  183-1S4. 


li' 


I' 


I' 


It 

f 


Op.  ,it.,  \\  3. 


op.  1 1/.,  p.  n. 


t»- 


iifli 


440 


The  Income  Tax 


cent,  and  incomes  exceeding  $20,000  at  five  and  one-half  per 
cent. 

§  3.    The  Act  of  1864 

As  the  war  progressed,  the  need  of  more  revenue  was 
apparent,  and  in  the  spring  of  1864  Congress  prepared  a 
far  more  elaborate  and  comprehensive  code  of  taxation, 
which  finally  became  law  on  June  30.  This  law  included 
some  important  changes  in  the  income-tax  provisions,  which 
were  preceded  by  an  interesting  discussion.  A  large  part  of 
this  discussion  turned  on  the  question  of  graduation. 

The  law  of  1862,  it  will  be  remembered,  had  imposed  two 
rates,  namely,  three  per  cent  up  to  ten  thousand  dollars,  and 
five  per  cent  above  ten  thousand  dollars.  The  committee  of 
ways  and  means,  in  introducing  the  bill  for  a  new  income 
tax  in  April,  1864,  had  suggested  a  proportional  tax  of  five 
per  cent.  On  April  26,  Frank,  following  the  recommenda- 
tions of  the  commissioner  of  internal  revenue,  recommended 
a  progressive  scale  of  five  per  cent  up  to  ten  thousand  dollars, 
seven  and  one-half  per  cent  up  to  twenty-five  thousand  dollars, 
and  ten  per  cent  over  twenty-five  thousand  dollars.  He  put 
it  on  the  ground  of  increased  revenue,  and  claimed  that  the 
system  of  graduation  was  not  repugnant  to  the  uniformity 
clause  of  the  Constitution.'  The  principle  was  defended, 
among  others,  by  Grinnell  and  Spalding,  not  so  much  on  the 
ground  of  revenue  asof  ju.stice,  It  was  opposed,  however,  by 
Morrill  and  Stevens.  The  latter  said  :  "  It  seems  to  me  that 
it  is  a  strange  way  to  punish  men  bccatise  they  are  rich,"  and 
declared  that  the  committee  "  were  of  the  opinion  that  the 
principle  was  a  vicious  one.  I  think  the  principle  of  taxing  a 
man  who  is  worth  twenty  thousand  dollars  more  in  propor- 
tion to  his  wealth  is  an  unjust  one.  ...  If  he  is  worth 
over  a  million  dollars,  we  might  as  well  provide  that  the 
government  shall  take  the  surplus.'"'^  Morrill  stated  that  no 
one    doubted    the    con.stitutional    power  of    the    government 

'  (','iii,";iiion(t/  <7/o/>f,  jStA  Congrtss,  Jst  Stsiicn.    \V.isli;ngton,  l8<)4,  p.  1S7O. 
■•'  ('/.  .!f..  p.  lS-6. 


The  Civil  War  Income  Tax 


441 


either  to  levy  an  income  tax  or  to  provide  for  a  progressive 
feature.  But,  he  said,  "  experience  shows  that  people  who 
are  taxed  unequally  on  their  incomes  regard  themselves  as 
being  unjustly  treated,  and  seek  al!  manner  of  ways  and 
means  to  evade  it.  This  inequality  is  in  fact  no  less  than  a 
confiscation  of  property,  because  one  man  happens  to  have  a 
little  more  money  than  another."  ' 

The  House,  however,  did  not  agree  with  the  committee,  and 
adopted  a  graduated  scheme.  Two  days  later  Mr.  Morrill 
reverted  to  the  subject  in  a  rather  violent  diatribe  against 
the  "spirit  of  agrarianism,"  predicting  that  the  chief  result  of 
this  "  differential  system  "  would  be  to  lead  American  citizens 
to  expatriate  themselves.  "  On  all  other  subjects  we  tax 
every  man  alike.  We  do  not  tax  the  manufacturer  or  producer 
of  merchandise  a  greater  percentage  because  he  manufactures 
or  produces  more  than  his  neighbor.  .  .  .  This  provision 
goes  upon  the  principle  of  taxing  a  man  more  because  he  is 
richer  than  another.  The  very  theory  of  our  institutions 
is  entire  equality  ;  that  we  make  no  distinction  between  the 
rich  man  and  the  poor  man.  The  man  of  moderate  means  is 
just  as  good  as  the  man  of  more  means,  but  our  theory  of 
government  does  not  admit  that  he  is  better,  and  I  regard  it 
as  an  evidence  of  the  spirit  of  agrarianism  to  present  a  law 
here  which  shall  make  any  such  distinction.  It  is  seizing  the 
property  of  men  for  the  crime  of  having  too  much.  .  .  .  We 
have  too  few  rich  men  in  the  country  to  make  a  distinction 
that  may  induce  them  to  expatriate  themselves.  .  .  .  Let  us 
be  just.  ...  In  this  proposition  there  seems  to  me  to  be 
something  unjust."  ■ 

W^hen  the  hill  reached  the  Senate,  the  finance  committee 
slightly  modified  tlie  graduated  scheme,  reducing  the  upper 
limit  from  ten  per  cent  cm  incomes  over  twenty-five  thousand 
dollars  to  seven  and  one-tuilt'  per  cent  on  incomes  over  ten 
thousand  dollars.  Fessenden,  in  reporting  the  bill,  stated 
that  there  liad  been  considerable  discussion  in  t!ie  committee 


i-li 


11! 


"^i 


'^ 


-  O/'.  1.1.'.,  i>.  l>/40. 


lil  .S>-j/.'H.      Washintjlon,  1S64,  ]..  1S76. 


% 


442 


The  Income  Tax 


and  that,  "  for  myself  individua]ly,  my  own  opinion  is  not 
exceedingly  well  fixed  on  this  point.  The  income  tax  at  best 
is  a  discrimination.  ...  I  have  been  in  favor,  from  the 
beginning;,  of  making  some  discrimination  as  against  large 
incomes."  He  declared  himself  to  be  in  accord  with  "  the 
principle  that  those  having  very  large  incomes  can  afford, 
and  perhaps  better  afford  than  those  who  have  smaller  ones, 
to  pay  a  tax,  and  a  larger  tax,  the  discriminating  tax  if  you 
please."  But  he  declared  that  "there  is  and  ought  to  be  a 
sort  of  conservilive  sentiment  to  protect  property,"  and 
"  that  no  odious  and  ungenerous  discrimination  "  should  be 
made.'  Sumner,  although  undecided  as  to  whether  to  i)refer 
the  Senate  to  the  House  proposition,  declared  himself  not 
ready  to  oppose  the  principle  of  graduation  in  general,  and 
read  a  long  quotation  from  Say  in  favor  of  progressive 
taxation.''^  Sherman  also  felt  doubtful  about  the  whole 
matter,  while  b'oote  and  Johnson  took  strong  ground  against 
it.  Davis,  however,  declared  that  the  principle  of  graduation 
was  nothing  but  a  "  recognition  of  the  idea  that  ta.xes  shall  be 
paid  according  to  the  ability  of  persons  to  pay."  ^  The  result 
was  that  the  amendment  was  adopted. 

A  few  days  later  (irimes  introduced  another  amendment, 
making  incomes  over  fifteen  thousand  dollars  taxable  at  ten 
per  cent.  Referring  to  Sumner's  quotation  from  Say,  he 
stated  that  he  was  simply  proposing  "to  carry  the  principle 
out  to  a  little  greater  extent,  and  cause  those  men  who  have 
large  fortunes  and  derive  therefrom  large  incomes,  to  pay  a 
little  amount  in  addition  to  the  rate  paid  by  the  small  men 
who  exhaust  nearly  all  of  this  income  in  the  support  of  their 
families.  If  there  is  any  class  of  men,"  he  continued,  "that 
the  distinction  ought  to  be  made  in  favor  of  and  not  against, 
it  is  the  very  class  of  men  we  have  discriminated  against,  and 
now  wc  reach  a  class  of  men  who  have  a  surplus  over  and 
above  the  money  that  is  necessary  to  meet  their  family  ex- 
penses, and  it  is  that  class  that  I  propose  to  reach."  ■•     The 

»  Op. 


'  ('/>.  .;/.,  )i.  2513. 
»  ('/.  <//.!'.  2514. 


.-!/.,  p.  2515. 
.■.'.,  p.  2760. 


The  Civil  War  Income    Tn 


413 


«*s  IT.  ;.<'!u 


Senate  again  agreed  to  this  proposition.     When  ; 
ever,  emerged  Irom  conference,  the  ten  per  rent  rat. 
to  begin  at  ten  thousand  dollars,  a  fact  which  shows 
feeling  in  favor  of  a  higher  rate  on  the  larger  incomes 
constantly  growing. 

A  few  other  provisions  of  the  bill  were  also  disc  us.cd 
According  to  the  law  of  1863,  it  will  be  remembered  that  th. 
amount  paid  for  house  rent  was  deducted  from  income.  The 
House  bill  of  1.S64  cut  down  the  deduction  for  house  rent  to 
two  hundred  dollars,  but  introduced  the  provision  that  if  a 
man  lived  in  his  own  house,  the  rental  value  up  to  the  extent 
of  two  hundred  dollars  should  also  be  deducted,  in  other 
words,  the  House  bill  introduced  the  principle  that  income 
was  to  include  not  alone  money  income,  but  al.so  benefit  or 
psychic  income.  When  it  reached  the  .Senate,  however,  the 
committee  of  finance,  as  Fessenden  explained,  "came  to  the 
conclusion  that  it  was  impossible  to  carry  out  that  provision 
without  making  a  very  odious  discrimination  esiieciallv  be- 
tween town  and  country."  '  He  thought  "  the  safer  and  bet- 
ter principle  would  be  to  allow  ever\  man  the  rental  value  of 
his  house,  whether  he  owned  it  himself  or  rented  it.-"  An- 
other interesting  discussion  arose  over  the  question  of  jirnfits 
on  sales.  The  commissioner  of  internal  revenue  had  de- 
cided that  if  a  man  bought  a  piece  of  land  and  sold  it  after 
the  expiration  of  a  given  period,  the  difference  between  the 
cost  and  the  selling  price  was  to  be  returned  as  income  within 
the  year  of  sale.  Fessenden  pointed  out  that  this  uas 
erroneous,  because  the   difference  in   the   sellin 


rice   was 


'  "Inasmuch."  he  cuntinucl.  "n^  it  ilciK'inli-.l  upi'ii  th,-  nnt,  it  wi.ul'i  \\^\-  n  i 
sort  of  c.inneLti"n  with  tlic  icKt  .>!'  niMi\  li  ,iivi.v  i,ri;;inallv,  i  ut  iii'.  nh  u;>.ti  ■,!!!• 
rcni.il  valiir.  .md  the  rt-nl,il  va'ui'  wmil  i  <l<  pin  I.  in  a  \irv  ;;ri  a!  clr-r.r,  iij  ,  n  ;hf 
place  where  it  hapfieneil  to  lie  locate  I.  liiLs  it  u,,uM  he  iiii|,i  ^,,i.l,  ;  ii,ak  ■  it 
e(|ual  in  any  way.  It  wul  I  ini|M  ve  .1  Lui'leii  upon  crrt.->:;;  un  ti  \\\\  li.i;  ;  1.  ncl 
to  live  in  a  city,  from  whiih  nun  \\\\\\^  in  ilii  i.  untr>  wlurc  k  n;»  art  \^\\.  ..  ni- 
parativelv  iiothinjj,  xvoiil  1  lu-  e\..Tnptt.l  cnl;ir!v."  —  ('/>.  ,  ;■,,  p.  2;i7. 

'■'Senator  Kessenlen,  li'wcvii,  uas  nii-takin  m  ihiiiko  g  ti  at  tl  i^  \ia~  "'.e 
provision  .)f  the  old  law.  .\s  has  iu-t  hcen  t\p!,\  nc  1,  ihc  ol,i  j.iu  ^  yW-  o,  ,.nly 
to  the  actual  rent  pai.l,  not  t-  llie  n  n'.il  x.i'u- 


444 


Thf  Income  Tax 


really  to  be  considered  an  accretion  to  capital  rather  than  as 
income.'  He  conceded  that  the  matter  had  given  the  com- 
mittee considerable  difficulty,  but  concluded  that  the  easiest 
way  out  of  the  difficulty  was  to  declare  that  only  the  net 
profits  realized  by  sales  of  property  upon  investments  made 
within  the  year  shoiad  be  chargeable  as  income. 

The  law  of  1864  provided  for  an  income  duty  at  the  rate 
of  five  per  cent  on  the  excess  of  tdoo  up  to  $5000;  seven 
and  one-half  per  cent  on  the  excess  over  $5000  up  to 
)» 1 0,000,  and  ten  per  cent  on  the  excess  over  jj  10,000.' 
Hanks,  trust  companies,  savings  institutions,  and  insurance 
companies  were  taxed  five  per  cent  on  their  dividends ;  and 
railroads,  canals,  turnpike,  and  slack-water  companies  five 
per  cent  on  their  dividends  and  the  interest  on  bonds,  the 
amount  of  tax  in  all  of  these  cases  to  be  deducted  from  the 
sums  due  to  the  security  holder.  Salaries  were  also  taxable 
at  the  rate  of  five  per  cent  on  the  excess  over  $600.  While 
the  personal  income  tax  was  to  be  levied  up  to  and  including 
the  year  1870,  no  such  limitation  was  put  upon  the  salaries 
and  dividends  tax,  perhaps  through  an  oversight. 

Thi-  dividend  and  interest  tax  and  the  salary  tax,  although 

sep;    itely  mentioned,  were  really  a  part  of  the  income  tax. 

To       s  extent,  therefore,  the  principle  of  stoppage  at  source 

\\  '        pplicd.     The  graduated  principle   of  the   income   tax 

however,  obviously  not  be  applied  to  the  dividends  and 

icst  tax,  and  it  was  for  this  reason  that  the  proportional 

■  of  five  per  cent  was  imposed.    In  the  case  of  the  salaries 

ax  the  same  impracticability  did  not  exist,  but  despite  this 

fact,  the  only  departure  from  the  strict  j)rop()rtional  rate  was 

the  uniform  deduction  of  S600. 

The  old  distinctions  of  the  law  of  1862  with  reference  to 
the  incomes  of  citizens  residing  abroad  and  the  income  from 
government  bonds  wore  abandoned,  the  same  rates  being 
now  applicable  to  all  kinds  of  income.  A  provision  was  also 
introduced  that  "  no  profits  realized  by  sales  of  real  estate 
purchased  within  the  year,  for  which   income  was  estimated, 

'  op.  ,1/.,  |i.  251(1.  -  Alt  of  Jum-   50,  I.S(i4,  t.  (.Uxiil,  sfc.  116. 


The  Civil  War  Income   fax 


445 


shall  be  chargeable  as  income ;  and  losses  on  sales  of  real 
estate  purchased  within  the  year  for  which  income  is  esti- 
mated shall  be  deducted  from  the  income  of  such  year."  ' 
In  estimating  the  annual  income,  deductions  were  allowed  for 
all  taxes,  salaries,  income  from  dividends,  or  interests  on  se- 
curities where  the  tax  was  paid  by  the  company,  and  the 
amount  paid  by  any  person  for  the  rent  of  the  homestead 
occupied,  as  well  as  the  rental  value  of  any  homestead  occu- 
pied. A  provision  was  inserted  includinj;  in  the  annual  in- 
come "  the  income  or  gains  derived  from  the  purchase  and 
sale  of  stocks  or  property,  and  the  increased  value  of  live 
stock,  whether  sold  or  on  hand,  and  the  amount  of  sugar, 
wool,  butter,  cheese,  pork,  beef,  mutton,  or  other  meats,  hay 
and  grain  or  other  vegetable,  or  other  productions  of  the  es- 
tate of  such  persons  sold."  Allowance  was  made  for  "  usual 
or  ordinary  repairs,  not  exceeding  the  average  for  the  pre- 
ceding five  years,"  but  it  was  provided  that  "  no  deduction 
shall  be  made  for  any  amount  paid  out  for  new  buildings, 
permanent  improvements  or  betterments  made  to  increase 
the  value  of  any  property  or  estate."-  A  consul  of  a  foreign 
country,  not  a  citizen  of  the  United  States,  was  exempt  from 
income  ta.x,  provided  that  recii)roca!  privileges  were  conferred 
by  the  foreign  governments.'' 

Finally,  the  rates  of  the  tax  on  gross  receipts  were  in- 
creased so  that  steamboat  and  canal  comiianics  paid  two  and 
one-half  per  cent;  toll  roads,  ferries,  and  bridges,  three  per 
cent.  Hut  it  was  expressly  provided  that  the  tax  might  be 
added  to  the  rate  of  fare.  Express  companies  paid  three  per 
cent;  insurance  companies  one  and  one-half  per  cent;  tele- 
graph companies  five  per  cent;  theatrical  and  similar  enter- 
prises two  percent;  lotteries  five  per  cent;  advertisements 
three  per  cent.  Ail  such  enterprises  were  required  to  return 
the  gross  receipts  annually.  In  case  of  neglect  or  refu.s;il. 
ten  per  cent  was  to  be  adtled,  and  for  any  attempt  at  evasion 
a  penalty  of  one  thousand  dollars  was  to  be  imposed. 

Such  was  the  law  of  1864,  which  served  as  the  model  ujjon 
'  Sec.  116.  -  >n .  117.  '  Si-i  .  17S. 


fj 


.?»- 


*Sf 


ml, 


446 


Tlie  Income  Tax 


which  all  subsequent  acts  were  based.  Before  the  law  was 
put  in  operation,  however,  it  was  amended  in  several  particu- 
lars by  a  law  of  the  following  year,  which  increased  the  rates 
to  five  per  cent  on  the  excess  over  J>6cx}  dollars  up  to  $5000, 
and  ten  per  cent  on  the  excess  over  $5000.*  A  slight  change 
was  also  made  in  section  1 17  whereby  the  old  clause  as  to  the 
inclusion  in  income  of  the  "  increased  value  of  live  stock," 
etc.,  was  altered  so  as  to  read  "the  amount  of  live  stock,"  etc. 
The  administrative  sections  of  the  law  were  improved  in  sev- 
eral particulars.  The  assistant  assessor  was  empowered  to 
require  every  list  or  return  to  be  verified  by  the  oath  or  affir- 
mation of  the  party,  and  to  increase  the  amount  if  he  had 
reason  to  believe  it  understated.  Furthermore,  in  case  of 
refusal  to  make  a  return,  or  of  a  false  or  fraudulent  return, 
the  assessor  or  assistant  assessor  was  to  make  the  return  "ac- 
cording to  the  best  information  he  can  obtain  by  the  exami- 
nation of  such  person  and  his  books  and  accounts,  or  any 
other  evidence."  In  the  case  of  wilful  neglect  or  refusal, 
twenty-five  per  cent  was  to  be  added ;  in  the  case  of  false  or 
fraudulent  returns  one  hundred  per  cent.  Any  one  con- 
victed of  fraud,  moreover,  might  be  fined  $1000  or  im- 
prisoned for  not  more  than  a  year,  or  be  subjected  to  both 
punishments.  If  any  return  should  be  increased  by  the  as- 
sistant assessor,  the  individual  might  "  exhibit  his  books  and 
accounts  and  be  permitted  to  prove  and  declare  under  oath 
or  affirmation  the  amount  of  annual  income  liable  to 
be  assessed."  Such  evidence,  however,  was  not  to  be 
"considered  as  conclusi--e  of  the  facts."  Appeal  might 
be  taken  to  the  assessor  ol  the  district,  and  finally  to  the 
commissioner  of  internal  revenue."  These  administrative 
changes  aroused  practically  no  discussion  at  ail,  and  the 
same  may  be  said  of  the  joint  rjsoiution  of  July  4,  1864, 
which  imposed  an  additional  special  income  tax  jiayable  in 
October,  1S64,  to  defray  the  expenditure  for  the  war  boun- 
ties, at  the  rate  of  five  j)er  cent  on  ail  incomes  over  S600 
received  in  1.S63. 

'  Act  of  March  3,  iSdj,       ixxviii,  ■^fc.  I.  -  See.  118, 


The  Civil  War  huome   Tax 


447 


In  his  report  of  December,  1864,  Fes^ondcn,  who  had  now 
become  secretary  of  the  treasury,  upheld  the  doctrine  of 
graduated  taxation  as  contained  in  the  law.  lie  declared 
himself,  however,  opposed  to  the  exemption.  "The  Secre- 
tary would  further  suggest,"  he  said,  "whether  the  .'ncome 
tax  should  not  be  collected  upon  all,  without  exemption.  As 
the  law  is,  it  opens  the  door  to  innumerable  frauds,  and  in  a 
young  and  growing  country  the  vast  majority  of  incomes  are 
small,  while  all  particip.ite  alike  in  the  blessings  of  good  gov- 
ernment. The  adoption  of  a  .scale,  augmenting  the  rate  of 
tax.ition  upon  incomes  as  th<:\  rise  in  amount,  although  un- 
equal in  one  sense,  cannot  be  considered  oppressive  or  unjust, 
inasmuch  as  the  ability  to  pay  increases  in  much  more  than 
arithmetical  proportion  as  the  amount  of  income  exceeds  the 
limit  of  reasonable  necessity."  ^ 

The  Secretary,  however,  did  not  deceive  himself  as  to  the 
practical  operation  of  the  law.  "  p'rom  the  results  of  experi- 
ence, as  well  as  from  all  the  information  received,  the  Secre- 
tary is  well  convinced  that  much  revenue  fails  to  be  collected 
through  an  imperfect  execution  of  the  law,  and  more  through 
a  fraudulent  evasion  of  its  provisions."  He  was,  however, 
not  without  hope  for  the  future.  "  Time  and  cff(jrt  will,  it  is 
hoped,  remedy  these  evils  in  a  great  dei;ree,  and  the  confident 
expectations  of  those  who  framed  it  be  realized.  In  the 
meantime,  no  effort  should  be  spared  to  perfect  it,  as  far  as 
possible,  and  no  experiment  to  increase  its  efficiency,  of  which 
there  is  a  reasonable  hope  of  success,  should  be  left  untried." 

In  his  report  of  the  same  period,  the  cnmmissioner  of 
internal  revenue  discussed  the  improvement  in  the  fiscal  re- 
sults. During  the  year  ending  July,  1864,  the  income  tax 
proper  yielded  over  twenty-three  millions,  or,  wiih  the  addi- 
tion of  the  tax  on  salaries  and  on  dividends  and  interest, 
almost  thirt\'-f!ve  millions.  The  commi'-'-ioiicr  c<>nside»  d 
"that  the  income  tax  collected  durin-  the  hist  fiscal  year 
represents  [iretty  fairly  what  a  levy  ot  three  [ler  cent  sho.„;,; 
yield."      Referring  to  the  pios;ieets  for  the  coiv.m^   \e:ir,  he 

'  Report  cf  the  S/trt;.i'\  ■■>  t'.f  i  roiur-.  ;  •  ::i-t-      ^Vashnj,'-.',!!.  ist.4.  p.  15. 


ff; 

ii* 

i  ' 

'  'f> 


448 


The  Income  Tax 


%\ 


1^* 


loncudcd  that  "  nuiiiy  persons  will  escape  assessment  who 
could  not  escape  payment  through  banks,  railriad  corpora- 
tions and  paymasters.  Hut  the  duties  on  income  will  in 
general  be  assessed  more  exactly  and  collected  more  closely 
than  heretofore.  Tie  assessors  are  armed  with  powers  for 
investigation  and  discovery  which  have  not  hitherto  been 
conferred,  and  they  have  become  more  thoroughly  acquainted 
with  their  obligations  under  the  law  than  at  any  prior  period."  * 
The  commissioner  called  attention,  however,  to'the  dilficulties 
connected  with  the  assessment  of  farmers'  incomes.  "  The 
best  test  of  the  yearly  income  derived  from  real  estate  is  its 
rental  value.  A  rule  requiring  such  income  to  be  assessed 
on  that  value  would  be  conveniently  practicable,  and  would 
obviate  the  necessity  of  the  vexatious  inquisition  now  required 
in  ascertaining  the  comparative  value  of  live  stock  at  different 
periods  of  the  year,  the  amount  of  butter,  beef,  mutton,  pork, 
cheese,  wool,  hay,  grain  and  other  products  sold  or  on  hand. 
Kstimates  of  these  must  needs  be  very  unequal  and  returns 
incomplete,  so  that  the  burden  of  the  ta.\  is  unequally  dis- 
tributed." Furthermore,  he  said,  "  I  am  unable  to  see  why  a 
man  who  consumes  his  income  should  not  be  ta.xed  for  it  as 
well  as  one  who  saves  it,  nor  why  one  who  lives  in  his  own 
house  should  not  be  taxed  on  its  rental  value,  as  much  as  if 
he  let  it  to  another  and  put  the  rent  in  his  purse.  If  it  be 
deemed  right  to  allow  an  occupant  of  his  own  homestead 
such  a  portion  of  his  rental  value  unassessed  as  would  suffice 
to  pay  the  rent  of  a  moderate  dwelling,  the  excess  of  the 
annual  value  of  such  homestead  above  that  sum  might,  with 
justice,  be  taxed." '^  An  allowance  of  three  or  four  hundred 
dollars,  he  thought,  would  suffice  for  this  purpose. 

These  views  of  the  commissioner  were  confirmed  by  the  re- 
port of  the  Special  Revenue  Commission  in  1865,  which  was 
composed  of  David  A.  Wells,  Stephen  Colwell,  and  S.  S. 
Hayes.  The  commission  recommended  that "  in  assessing  the  in- 
come tax  no  allowance  whatever  be  made  fo-  house  rent,  or  at 


Kff'ori  oj  thf  (    ■itmiiiiuiier  cf  Inttrnal  Kneniic  for 


i'^/'. 


Wasliingti'U, 


1865,  p.  5. 


Or.  I.U.,  i>.  I  J. 


The  Civil  War  Income   Tax 


449 


least  that  the  Income  allowed  to  bedcduitccl  for  rental  should 
not  in  any  case  be  allowed  to  exceed  $300.  As  the  law  now 
stands,  rentals  of  an  excessive  and  unreason.ihle  amount  arc 
also  deducted."  The  gain  to  the  revenue  in  the  state  of 
New  York  alone,  from  the  repeal  of  that  i>art  of  the  act  au- 
thorizing the  deduction  of  rentals  woulil.in  the  opinion  of  the 
revenue  officials,  amount  t(»  over  two  millions  of  dollars  ])er 
annum.'     Congress,  however,  refused  to  follow  their    idvice. 

§4.     The  Aftermath  of  t lie    War 

With  the  close  of  the  war  the  (picstion  arose  as  to  the  per- 
manence of  the  income  tax.  For  the  tinn.  being,  indeed,  the 
revenue  was  still  sorely  needed,  so  that  there  could  be  no 
question  of  immediate  change.  On  April  25,  i86<^),  Morrill  re- 
ported a  bill  from  the  committee  on  ways  and  means,  and 
on  May  7  explained  the  proposal.  The  coniinittee,  he  said, 
"  have  prepared  some  modifications  of  the  income  law,  but 
have  not  reached  the  conclusion,  while  the  in(histri;ii  employ- 
ments must  remain  to  a  consitlorable  extent  heavily  burdened, 
that  it  can  yet  be  wholly  dispensed  with.'"-  Morrill  called  at- 
tention to  the  fact  that,  according  to  the  terms  of  tiie  original 
law,  the  act  was  to  expire  in  1870.  "and  thus  a  temporary 
character  was  put  upon  its  face.  "  That  it  had  been  a  fiscal 
success,  he  thought,  could  not  be  doubted.  After  referring 
to  the  large  revenues  derived  from  the  tax,  and  to  the  special 
income  tax  levied  in  1864,  he  said:  "  I  jioint  to  these  facts 
not  only  as  a  broad  evidence  of  their  jjatriotisin  and  wealth, 
but  as  a  proud  evidence  of  their  strict  integrity  of  character. 
Strong  as  the  temptatioii  might  be  for  evasive  returns,  sore 
as  they  might  be  in  coiisetiuence  ot  the  suitt  pursuit  and  the 
continuous  ex.ictions  of  the  tax  gatherer,  they  even  paid  more 
in  1863  upon  the  second  call  than  on  the  first.  Their  coun- 
try was  in  need,  and  even  the  greed  lor  gain  could  not  tempt 

'  llousf  F.xt,uti-e  !1,,unirnli,  First  Se/sion.  ;o''i  C  ir^ir  <,  nn.  17,  vi'l.  vii. 
'  Cviit;rc!ih<ntil   Ulvi>f,  jQlH    Con^Kss,  Fir.t  .s.'.wii.     Washingtun,    i'<i-''.  \k 


1'^ 


il 


^^J 


MKROCOrV   RBOIUTION   TBT  CHART 

(ANSI  and  ISO  TEST  CHART  No   2) 


^  /APPLIED  IIVMGE     I 

^K  '653   East    Main    Street 

^SrjS  Rochester.    New    York         U609       USA 

'■JSS-  (716)   482  -  0300  '  Phone 

^S  t^'S)   288  -  5989  -  Fo» 


450 


The  Income  Tax 


the  American  people  to  defraud  their  government.  .  .  .  The 
law  left  it  almost  to  the  conscience  of  each  man  as  to  how 
much  he  should  pay,  and  all  seemed  to  vie  with  each  other 
as  to  who  should  pay  the  most.  I  question  whether  any 
people  ever  paid  a  tax  more  honestly  and  accurately,  and  I  ques- 
tion still  more  whether  any  free  people  ever  imposed  upon 
themselves,  through  their  chosen  representatives,  taxes  so 
thick  and  fast." 

If,  however,  the  income  tax  were  to  be  contemplated  as 
a    part    of    the    permanent    policy   of    the   country,    many 
changes,  he  thought,  would   be   needed.     He   declared   the 
objections  to  be  as  follows  :  First,  the  law  is  "  inquisitorial  of 
necessity  in  its  character,  and  Americans,  like  people  else- 
where, though  not  averse  to  a  knowledge  of  the  secrets  of 
others,  are  quite   unwilling  to  disclose  their   own.     Among 
commercial  men  such  disclosures  may  be  disastrous.  .  .  .     The 
temptation  to  make  under-statements,  to  lend  to  these  state- 
ments the  sanction  of  an  oath,  tends  to  sap  and  mine  public 
morals,  until  men  begin  to  excuse  themselves  for  their  own 
wrong-doing,  because,  it  being  so  common,  that  to  do  other- 
wise would  be  to  fail  in  average  smartness."     Furthermore, 
"  when  we  take  into  consideration  the  sources  from  which  in- 
come is  derived,  the  habituues  of  the  different  persons  who 
pay  the  tax,  thedifficulty  of  apportioning  it  so  that  each  will  have 
paid  in  just  proportion  to  every  other  person,  leaving  each  rela- 
tively in  the  same  conditions,  the  perplexities  become  almost  in- 
surmountable."    In  accordance  with  these  principles,  Morrill 
declared  that  it  was  desirable  to  lessen  the  weight  of  the  inco   ,o 
tax,  and  he  proposed  that  the  exemption  be  increased  to  $1000, 
and  that  the  rate  be  made  uniform  at  five  per  cent,  for  "  in  a 
republican  form  of  government  the  true  theory  is  to  make 
no  distinctions  as  to  persons  in  the  rates  of  ta.xation.     Recog- 
nizing no  class  for  special  favors,  we  ought  not  to  create  a 
class  for  special  burdens."  ' 

The  proposition  led  to  some  discussion.     Raymond  declared 
his  surprise  that  the  chairman  of  the  committee  of  ways  and 

'  op.  ut.,  p.  24 J  7. 


The  Civil  War  Income  Tax 


451 


means  should  have  found  it  necessary  to  apologize  for  the 
continuance  of  the  tax.  He  stated  that  "income  is  the  first 
thing,  so  far  as  industry  and  the  products  of  industry  are  con- 
cerned, which  f  hould  be  ta.yjd."  '  He  also  objected  to  the 
abandonment  of  tlie  progressive  principle.  In  a  passage  in 
which  he  displayed  t.  slight  acquaintance  with  foreign  scien- 
tific literature,  he  stated :  "  I  know  that  theoretical  writers 
insist  that  it  is  unjust  and  impolitic  to  impose  a  graduated 
income  tax ;  that  every  man  should  pay  the  same  percentage 
on  his  income,  whatever  its  amount  may  be."  But  he  never- 
theless upheld  the  principle  on  the  ground  of  taxing  "  super- 
fluities instead  of  luxuries."  When  the  matter  was  again 
taken  up  a  few  weeks  later,  on  May  23,  Pike  objected  both 
to  the  proportional  rate  and  to  the  proposed  increase  of  ex- 
emption, suggesting  a  continuance  of  the  progressive  rate, 
and  stating  that  "no  one  of  those  upon  whom  the  high  rate 
of  income  tax  was  charged  had  asked  to  be  relieved  from  his 
burden,"  while  on  the  other  hand  "  petitions  from  struggling 
manufacturers  were  coming  from  all  quarters  of  the  land, 
asking  for  relief  from  the  other  taxes."  ^ 

Ross,  of  Illinois,  suggested  a  far  higher  scale  of  progression, 
rising  to  twenty-five  per  cent  on  incomes  over  sixty  thou- 
sand dollars.  Morrill  opposed  this  vehemently,  stating  that  the 
proposition  could  "only  be  defended  on  the  same  ground  that 
the  highwayman  defends  his  acts."  Spalding,  however,  who 
proposed  a  somewhat  modified  rate,  objected  to  this  charac- 
terization of  the  progressive  principle  by  Morrill  as  "  highway 
robbery,"  and  after  an  argument  which  based  the  defence  of 
graduation  on  the  principle  of  ability  to  pay,  stated,  "  I  can- 
not see  upon  what  ground,  in  morals  or  in  ethics,  or  in  logic, 
the  argument  of  my  learned  friend  from  Vermont  has  a  rest- 
ing place."  Sloane  also  stated  that  "  if  a  perfectly  just  sy.s- 
tem  of  taxation  could  be  devised,  every  man  would  be  taxed 
just  in  proportion  to  his  ability  to  pay  the  tax ;  that  is,  in  pro- 
portion to  the  excess  which  he  has  left  after  meeting  all  the 
legitimate  demands  upon  him."'     The  House  seemed  to  be 


>  Of. 


■-'  iff-. 


■Of. 


p.  2784. 


■  ;» 


1  '  ! 


!' 


k 


i|. 


I' 


if 


fill' 


452 


Tlu  Income  Tax 


convinced  by  the  arguments  in  favor  of  graduation  and  ac- 
cepted Pike's  amendment  for  a  duty  of  five  per  cent  on  in- 
comes up  to  five  thousand  dollars  and  ten  per  cent  on  the 
surplus. 

Several  other  points  were  touched  upon  in  the  discussion. 
Nicholson  dwelt  upon  the  injustice  of  deducting  six  hundred 
dollars  or  one  thousand  dollars  from  ordinary  incomes,  but 
not  where  the  tax  was  stopped  at  its  source  and  paid  by  the 
corporations.  Morrill,  however,  pointed  out  that  the  diffi- 
culties of  applying  the  principle  in  that  case  "  are  almost 
insuperable."  ^  Wilson  called  attention  to  tne  fact  that  the 
commissioner  of  internal  revenue  had  decided  that  no  loss 
should  be  deducted  from  the  income  which  was  not  incurred 
in  some  business  out  of  which  the  property  derived  a  profit, 
and  where  the  loss  incurred  overbalanced  the  amount  of 
profit.  He  suggested  that  all  losses  actually  sustained  in 
any  way  should  be  deducted,  and  his  amendment  was  agreed 
to.'  Hale  referred  to  the  abuses  on  the  part  of  the  assistant 
assessors  in  making  their  corrected  returns  of  income,  and 
imposing  the  high  penalty  whenever  they  consider  the  returns 
fraudulent.  He  contended  that  this  ought  never  to  be  done 
without  a  preliminary  hearing  accorded  to  the  taxpaper.^ 
Garfield  called  attention  to  one  feature  of  the  tax  "  which 
has  made  it  very  odious  in  many  parts  of  the  country," 
namely,  the  publicity  of  the  returns.  He  suggested  that, 
while  the  list  of  incomes  should  be  open  to  the  inspection 
of  "ihe  public,  it  should  not  be  furr.ished  for  publication. 
Morrill  defended  the  amendment,  although  he  conceded 
that  "  there  is  no  question  that  the  publication  of  these  lists 
has  a  tendency  to  increase  the  revenue."  * 

When  the  bill  came  up  in  the  Senate  on  June  2 1 ,  Fessenden 
reported  for  the  committee  that  the  changes  proposed  by  the 
House  could  not  be  put  into  operation  until  another  year, 
and  since  Congress  would  have  a  later  opportunity  to  con- 
sider  some  of  these  important  criticisms,  he  proposed  that 

'  op.  at.,  p.  2786.  «  Op.  ,i/.,  p.  2788. 

-  ('./>.  <;/.,  p.  2787.  <  0/>.  cit.,  p.  27S9. 


^^^ 


^'^mM^v 


f. 


The  Civil  War  Income  Tax 


453 


no  material  change  be  made  for  the  present.^  The  Senate 
adopted  this  suggestion,  which  was  concurred  in  by  the 
House,  and  thus  the  new  act  introduced  only  a  few  amend- 
ments. The  tax  which,  it  will  be  remembered,  had  hitherto 
been  applicable  only  to  all  persons  residing  in  the  United 
States  and  to  all  citizens  residing  abioad,  was  now  extended 
so  as  to  include  the  income  from  all  business,  trade,  and 
professions  carried  on  in  the  United  States  by  persons  resid- 
ing without  the  United  States  not  citizens  thereof.^  The 
income  tax,  moreover,  was  now  declared  payable  every  year 
"until  and  including  the  year  1870  and  no  longer."  The 
scale  of  the  salaries  tax  was  also  altered  so  as  to  conform 
to  that  of  the  income  tax  proper,  being  made  respectively  five 
per  cent  on  the  excess  over  six  hundred  dollars,  and  ten  per 
cent  on  the  excess  over  five  thousand  dollars. 

In  December,  1866,  the  commissioner  of  internal  revenue 
made  a  report  on  the  administration  of  the  tax,  and  for  the 
first  time  stated  the  number  of  taxpayers  and  the  amount 
of  revenue  in  each  class  of  the  progressive  tax.  He  then 
proceeded  to  advert  to  the  amendment  suggested  by  the 
House  in  the  discussion  of  1866,  calling  attention  especially 
to  the  question  of  exemption.  He  declared  that  the  purpose 
of  the  law  originally  had  been  to  exempt  so  much  of  one's 
income  as  was  demanded  by  his  actual  necessities ;  and  he 
pointed  out  that  the  raising  of  the  minimum  of  existence 
from  six  hundred  to  one  thousand  dollars  was  advisable  on 
the  ground  that  "  since  then  the  internal  tax  upon  commodi- 
ties, the  increase  of  customs  duty,  and  the  depreciation  of 
the  currency  have  wrought  an  almost  universal  advance  in 
prices."^  He  characterized  the  provision  governing  the 
profits  ard  losses  from  real  estate  as  a  quite  "  arbitrary  rule," 
and  stated  that  "  there  seems  to  be  little  reason  for  its  exist- 
ence." He  closed  his  discussion  by  calling  attention  to  the 
fact  that  vhe  large  revenue  of  the  year  just  ending,  including 

'  op.  cil.,  p.  3221.  -  Act  uf  July  13,  1.S66,  c.  cKxsiv,  sec.  9. 

^  Report  of  the  Ccmminioner  of  Interna!  Revenue  for  the  Year  emliiig  June  ;o, 
iSb(i.     Washington,  l8(j6,  p.  xxiii. 


P 


) 


11 

?1  I 


454 


The  Income  Tax 


the  good  returns  from  the  income  tax,  was  "  raised  with  prob- 
ably less  pressure  upon  the  people  than  that  of  smaller 
amounts  in  previous  years.  Their  enterprise  and  spirit  of 
accumulation  have  prevented  the  depression  of  business 
which  ordinarily  attends  heavy  taxation."  The  chief  reason, 
however,  which  he  did  not  mention  in  this  connection,  was 
the  one  referred  to  above,  namely,  the  prosperity  connected 
with  the  general  rise  in  prices. 

In  the  winter  of  1866- 1867,  the  subject  was  again  con- 
sidered, and  after  a  short  discussion  most  of  the  amendments 
suggested  in  1866  were  adopted.  In  one  respect,  however, 
a  change  was  made.  Congress  now  decided,  largely  for 
the  reason  that  the  revenue  was  no  longer  needed,  to  aban- 
don the  progressive  principle.  The  new  law  of  1867  ^  im- 
posed a  tax  of  five  per  cent  on  all  incomes  over  one  thou- 
sand dollars.  Income  was  declared  to  include  the  profits 
realized  from  the  sales  of  real  estate  purchased  within  the 
year,  or  within  two  years  previous.  The  amount  of  all 
premiums  on  gold  and  coupons  was  now  also  declared  to 
be  taxable  as  income,  although  the  law  did  not  state  whether 
such  premium  was  to  be  taxed  only  if  realized.  A  slight 
change  was  made  in  the  statement  as  to  the  produce  of 
the  farmer.  Whereas  the  earlier  laws  had  spoken  of  the 
"  amount  of  live  stock,"  etc.,  as  being  ta.xable  income,  the 
new  law  put  it  as  "  the  amount  of  sales  of  live  stock,"  etc. 
Deductions  were  allowed  for  all  losses  actually  sustained 
during  the  year,  although  the  provision  was  inserted  that 
there  should  not  be  included  in  the  deduction  any  "esti- 
mated depreciation  of  values  and  losses  within  the  year  on 
sales  of  real  estate  purchased  two  years  previous." 

With  reference  to  the  administrative  features,  the  penalty 
for  delay  in  payment  was  changed  from  ten  per  cent  to  five 
per  cent,  with  interest  at  one  per  cent  a  month.  The  penalty 
for  neglect  or  refusal  to  make  lists  was  raised  from  twenty- 
five  to  fifty  per  cent,  that  for  making  fraudulent  returns  re- 
maining at  one  hundred  per  cent.     The  dates  of  assessment 

1  Act  of  March  2,  1867,  c.  clxix,  sec.  13. 


ill 


The  Civil  War  Income  Tax 


455 


and  payment  were  moved  closer  to  the  beginning  of  the  year, 
the  date  of  assessment  being  changed  from  May  i  to  March  i, 
and  the  date  when  the  tax  was  payable  being  changed  from 
June  30  to  April  30.  Finally,  the  salaries  tax  was  declared 
inapplicable  to  mechanics  or  laborers  employed  upon  public 
works. 

Wells,  in  his  report  in  January,  1868,  called  attention  to 
the  fact  that  a  "considerable  falling  off  in  the  revenue  to 
be  derived  from  the  income  tax,  for  the  present  and  suc- 
ceeding fiscal  years,  may  be  expected,  both  from  the  reduc- 
tion of  the  tax  under  the  Act  of  May  2,  1867;  and  also 
from  losses  recently  experienced  through  the  shrinkage  in 
the  value  of  commodities." '  He  estimated  that  the  reve- 
nue for  the  coming  year  would  fall  to  about  thirty-five 
million  dollars.  Wells  discussed  two  points  of  principle 
in  the  existing  law.  The  first  was  the  matter  of  exemp- 
tion, which  was  allowed  unqualifiedly  to  all  persons  return- 
ing an  income.  He  thought  that  "the  original  object  of 
the  exemption  would  appear  to  have  been  entirely  lost 
sight  of  in  making  the  exemption  absolute  and  unqualified ; 
for  what  in  the  one  case  is  an  allowance  to  necessity  be- 
comes in  the  other  a  mere  incicnse  of  abundance."  He 
therefore  recommended  that  the  English  system  be  fol- 
lowed, and  that  the  law  be  amended  so  as  to  permit  the  ex- 
emption to  be  applied  only  to  incomes  under  fifteen  hun- 
dred or  two  thousand  dollars. 

The  other  point  to  which  he  referred  was  the  "  curious 
anomaly  which  allows,  on  the  one  hand,  an  unqualified  deduc- 
tion from  income  of  the  amount  paid  for  rent,  and  on  the  other 
hand  does  not  consider  as  income  in  any  degree  the  rental 
value  of  property  held  or  enjoyed  by  its  possessor."  He 
pointed  out  that  this  was  inconsistent,  "for  while  in  all 
other  departments  of  the  revenue  it  is  accepted  as  a  fun- 
damental principle  that  luxuries  especially  should  be  taxed,  in 
this  they  are  especially  exempted."  He  held  that  there  was 
nogood  reason,  "  when  asufficient  and  proper  sum  is  exempted 

'  Report  cf  ;hc  Special  Co:i:mi:zicncr  of  ir.c  Kcven-.ie.     \V;-.^h:ii^lun,  lS6o,  p.  62. 


I!  ;.  I 


\\ 


456 


The  Income   Tax 


in  the  first  instance  from  an  income  tax,  why  this  exemption 
should  be  further  increased  by  the  addition  of  rentals  or  ren- 
tal values."  On  the  contrary,  he  thought  that  "all  rental 
in  excess  of  a  certain  amount  should  be  considered  as  a  lux- 
ury and  taxed  accordingly."  '  Congress,  however,  refused  to 
take  any  action. 


I 


§  5.    The  Contest  over  the  Retention  of  the   Tax 

The  income  tax  was  to  expire  in  1870.  The  readiness  with 
which  the  people  had  submitted  to  it  during  the  war  diminished 
with  the  termination  of  the  conflict,  and  as  each  year  passed 
by,  the  tax  became  more  unpopular  and  as  a  consequence  less 
successful.  With  the  approach,  however,  of  the  period  of  its 
projected  disappearance,  the  discussion  as  to  its  continuance 
became  more  active.  The  commissioner  of  internal  revenue, 
in  his  annual  report  of  December,  1869,  declared  himself 
strongly  in  favor  of  its  continuance.  He  queried  as  to  whether 
"  we  can  part  entirely  with  the  receipts  from  this  source  of 
revenue ;  and  if  not,  whether  any  substitute  can  be  devised 
more  just  and  equitable,  and  less  burdensome  to  ta.x-payers."* 
"  My  opinion  is,"  said  he,  "  that,  so  long  as  a  large  internal 
revenue  is  required  by  the  official  necessities  of  the  gov- 
ernment, a  portion  of  that  revenue  should  be  collected  from 
incomes.  The  reasons  for  this  seem  apparent  and  forcible. 
This  tax  reaches  simply  the  profits  of  trade  and  business,  and 
the  increased  wealth  of  the  individuals  from  investments." 
He  thought  that  many  of  the  complaints  would  disappear  if 
the  tax  were  "  paid  as  these  profits  and  accumulations  accrr«," 
and  he  proceeded  to  discuss  the  chief  objection  that  "  it  leads 
to  a  system  of  espionage  into  private  affairs  that  is  not  only 
offensive  but  sometimes  injurious  to  individuals."  "  I  do  not 
see,"  said  he,  "why  this  objection  may  not  with  equal  force 
be  urged  against  all  taxes  upon  personal  property."    And  after 

'  Report  of  the  Speiial  Commissioner,  op.  cit.,  p.  63. 

^  Report  of  the  Commissioner  of  Internal  Revenue,  for  the  Year  ending  June 
JO,  iSbg.    W'ashingtvn,  iSC-y,  p.  xiii. 


The  Civil  War  Income   Tax 


457 


some  further  discussion,  he  concluded :  "  After  all,  it  is  but 
a  tax  upon  the  increased  wealth  of  the  nation.  ...  I  submit 
if  it  will  be  wise  to  abolish  the  income  tax  as  long  as  the 
labor,  industry  and  business  of  the  country  are  directly  or 
indirectly  subjected  to  any  considerable  taxation."' 

Wells,  in  his  report  of  the  same  year,  took  similar  f^mund 
in  a  passage  which,  in  view  of  his  later  opposition  to  the 
income  tax,  is  worthy  of  note.  He  declared  himself  in  favor 
of  retaining  the  income  tax,  although  he  suggested  that  the 
rate  be  reduced  from  five  to  three  per  cent,  not  only  because 
it  would  then  be  less  burdensome  to  the  individual,  but  be- 
cause, in  his  opinion,  the  lower  rate  would  yield  almost  as 
much  as  the  higher.  The  existing  rate  he  thought  too  high 
for  revenue  purposes,  and  he  held  that  the  tax  was  "  passing 
through  much  the  same  experience  as  the  whiskey  tax  when 
at  its  maximum."  2  Wells  also  repeated  his  recommendation 
that  the  exemptions  for  rentals  be  limited  to  two  hundred 
dollars.  "  No  claim  can  be  made  for  the  exemption  of  rent 
to  any  extent,  which  would  not  be  equally  valid  in  support  of 
the  exemption  of  any  other  expenditure ;  and  certainly  high 
rents  are  as  much  a  luxury  as  any  form  of  expenditure,  and 
as  little  deserving  of  economical  sympathy."  If  his  adoption 
should  be  suggested  both  as  to  the  abolition  of  this  exemption 
and  as  to  the  reduction  of  the  rate,  he  contended  that  the 
revenue  from  the  income  tax  would  be  maintained  and  that 
but  for  the  depression  in  business  the  yield  would  probably 
be  considerably  greater.  Referring  to  the  "proposition,  seri- 
ously advocated  in  many  quarters,  that  this  tax  should  be 
wholly  removed,"  he  called  attention  to  the  fact  that  during 
the  year  1868  the  tax  was  paid  by  only  two  hundred  and 
fifty  thousand  people,  who  nevertheless  represented  an  aggre- 
gate income  of  not  less  than  eight  hundred  millions.  "Allow- 
ing, then,  for  the  families  of  these  two  hundred  and   fifty 

'  op.  lit.,  p.  xix. 
Report  of  the   Special    Comoiissioiier   of  tJu-    Rnenue    upon    the    fiu/iistrv, 
Tr,i,/e.   Commerce,  etc.,  of  the   L'nite.l  States,  fir  the    i'eur  tS6,).     Wa-shingtcn, 
lS6q.  n.  Ixis. 


I  Si 

If 

II 


Is 

Hi 


'8i!Mi 


458 


The  Income   Tax 


thousand  contributors,  it  is  evident  that  only  about  a  million 
of  the  population  are  interested  in  having  tiie  tax  removed, 
while  the  remaining  thirty-eight  and  a  half  millions  of  the 
people  are  interested  in  having  it  maintained."' 

On  June  i,  1870,  the  matter  was  taken  u|)  in  Congress. 
The  committee  of  ways  and  means  had  reported  a  bill  to 
reduce  the  revenue  by  nearly  thirty-four  millions,  but  did  not 
include  the  abandonment  or  reduction  of  the  income  tax,  pre- 
ferring to  remit  the  inheritance  tax,  the  tax  on  sales,  the  tax  on 
gas,  the  tax  on  gross  receipts,  and  many  of  the  special  taxes. 
The  committee  bill  continued  the  tax,  with  the  one  important 
change  of  increasing  the  exemption  to  fifteen  hundred  dollars. 
McCarthy  maintained  that  the  revenues  might  be  reduced  still 
further,  and  that  the  income  tax  ought  to  be  included  in  the 
list  of  the  taxes  to  be  dropped.  "  This  income  tax  bears," 
said  he,  "  what  no  other  tax  bears  upon  its  face,  the  evidence 
that  it  was  only  considered  and  passed  as  a  war  tax,  being  lim- 
ited to  five  years  in  its  duration.  The  five  years  are  up;  the 
war  is  over ;  our  revenue  will  bear  the  reduction,  and  we  can 
afford  to  let  it  die.  I  do  not  hesitate  to  say  there  is  more 
dissatisfaction  with  this  tax  than  any  other.  Objections  to 
its  renewal  are  long,  loud,  and  general  throughout  the  country. 
Those  who  pay  are  the  exception,  those  who  do  not  pay  are 
millions ;  and  the  whole  moral  force  of  the  law  is  a  dead  letter. 
The  honest  man  makes  a  true  return  ;  the  dishonest  hides  and 
covers  all  he  can  to  avoid  this  obnoxious  tax.  It  has  no  moral 
force.  This  tax  is  unequal,  perjury-provoking  and  crime-en- 
couraging, because  it  is  at  war  with  the  right  of  a  person  to  keep 
private  and  regulate  his  business  affairs  and  financial  matters. 
Deception,  fraud,  and  falsehood  mark  its  progress  every  where 
in  the  process  of  collection.  It  creates  curiosity,  jealousy, 
and  prejudice  among  the  people.  It  makes  the  tax-gatherer  a 
spy.  .  .  .  The  people  demand  that  it  shall  not  be  renewed, 
but  left  to  die  a  natural  death  and  pass  away  into  the  future 
as  pass  away  all  the  evils  gr..wing  out  of  the  Civil  War."* 

'  Keporl  of  the  S/-,  vil  Cflmminioner,  op.  ,ii.,  p.  Kx. 

^  Congresst'iinl  in'ol,-,  //si  Compress,  jj  Session.     Washington,  1870,  p.  M01. 


The  Civil  War  Income   Tax 


439 


A  heated  discussion  now  ensued.  Among  those  who  ajjreed 
with  McCarthy  was  Butler,  of  iMassachusctts.  who  said  that 
'an  income  tax  levied  and  collected  as  ours  is,  is  the  most 
irritatinf(,  provocative  of  opposition,  and  imperfect  of  all  taxes.' 
He  found  the  principal  defect  to  consist  in  tiie  fact  that  "it 
mistakes  earnings  for  income.  It  treats  as  income  the  |)rod- 
uct  of  honest  labor,  whether  mental  or  i)hysical,  and  imder- 
takcs  by  inquisition  in  collecting  it  to  treat  every  man  in  the 
country  as  a  rogue  and  rascal  most  likely  to  evade  the  tax, 
and  thereby  succeeds  only  in  compelling  the  conscientious, 
the  honest,  and  the  just  men  to  pay.  .  .  .  The  difficulty  is, 
we  do  not  ta.\  incomes  at  all  —  only  the  con.sciences  of  tho«c 
who  are  sui>posed  to  have  incomes."'  He  suggested,  in  its 
stead,  "a  fair  income  ta.\  on  invested  capital  to  be  collected 
without  assessors  or  inquisition,"  —  virtually  on  the  l-inglish 
model.  Davi.s,  referring  to  the  abolition  of  the  I-lnglish  tax 
in  1816,  contended  that  this  government  ought  also  to  keep 
its  pledge  as  "an  example  of  the  virtue  and  value  of  integrity 
and  fair  dealing  between  a  government  and  its  people."'^  On 
the  next  day  he  went  into  its  defects  at  greater  length,  and 
now  for  the  first  time  intimated  that  it  was  of  doubtful  con 
stitutionality  as  being  a  direct  tax.-'^ 

On  the  other  hand,  most  of  the  speakers  declared  them- 
selves in  favor  of  the  ta.x.  Blair  contended  that  the  revenue 
could  not  be  spared,  and  that  it  must  be  borne  in  mind  tiiat 
"every  dollar  which  we  take  off  this  income  tax,  which  ap 
plies  to  the  rich  men  of  the  country,  must  be  laid  upon  the 
poorer  men."*  Kia  defended  the  tax  on  the  ground  that  if  it 
were  removed,  "  the  motive  of  the  taxpayers  for  keeiJing  strii  t 
watch  upon  the^  expenditures  of  the  government  will  be  vant- 
ing;"*  that  all  the  other  internal  revenue  taxes  were  war 
ta.xes  as  well  as  the  income  tax,  and  that  they  ought  first  to 
be  removed.  P'inally,  as  to  the  question  of  fraud,  he  asked 
whether  that  was  a  better  reason  for  removing  the  income  tax 
than  the  whiskey  and  tobacco  ta.xes.     Townsend  contended 


•Pi 


'   op.  (if.,  p.  3995. 
-  Of  nt..  I).  ^ou6. 


»  0*.  ,,.'.,  J,.  4031. 
*  (  f-.  ii: ,  II  3004. 


Of.  ,tl..  y.  3997. 


^isni 


W 


-■^mthi^A 


460 


The  Income   Tax 


that  "  the  clamor  in  favor  of  the  abolition  of  the  income  tax 
is  a  local  and  a  manufactured  cry.     It  does  not  come  from 
the  masses  of  the  |>coplc.     It  originated  amon^j  the  men  of 
gigantic  capital,  among  the  railroad  monopolists,  brokers  and 
dealers  in  stocks,  wholesale  importers,  mostly  foreigners,  and 
men  of  colossal  fortunes  and  extraordinary  incomes.     It  was 
started  by  papers  in  their  interest,  and  is  mostly  confined  to 
those  places  and  persons.     It  has  not  spread  to  the  country." ' 
Pomcroy  maintained  that  "  the  opposition  to  this  tax  comes 
from  the  men  who  are  fattening  on  the  capital  of  the  coun 
try."*     Roots  thought  that  "the  tax  is  very  much  like  a  boil 
that  a  man  had  on  his  nose.     He  complained  of  its  being 
there  very   much,   and  1.  s  friend  asked    him,   'Where  el.se 
would  you  like  to  have  it } '     Ho  thought  of  tiie  matter  for  a 
while,  and  then  answered  :  '  Well,  I  swon,  I  believe  I  would 
rather   have  it  on  some  other  man's  back.'"**     Loughridge 
called  attention  to  the  fact  that  New  York  state  had  paid 
about  one-third  of  the  entire  tax,  and  that  he  ea.sily  under- 
stood the  opi  )sition  of  the  New  Yorkers  ;  but  he  contended 
that  it  was  nevertheless  entirely  just,  because  at  least  one- 
third  of  the  entire  wealth  of  the  country  was  to  be  found  in 
New  York.     He  quoted  with  telling  effect  a  passage  from 
Amasa  Walker,  who,  in  his  book  on  Political  Economy,  had 
declared  himself  strongly  in  favor  of  the  tax.     As  a  result  of 
these  arguments  the  House  voted  to  continue  the  tax  indefi- 
nitely at  the  rate  of  three  per  cent,  but  with  an  increase  in 
the  exemption  to  two  thousand  dollars. 

A  few  weeks  later  the  bill  was  taken  up  in  the  Senate, 
where  it  met  with  determined  opposition.  Sumner  said : 
"Sir,  the  income  tax  must  go.  It  must  not  be  continued. 
It  has  already  lived  too  long  for  the  good  of  the  country."* 
Coiikling  declared  that  "no  exigencies  whatever  will  jus- 
tify or  tolerate  the  revival  of  the  odious  tax  misnamed  the 
Income  Tax."*"'  Corbett,  who  stated  that  he  had  been  in 
favor  of  the  tax  as  long  as  it  was  needed,  now  said,  "I  be- 

'  ''/*•  '■"•■  P-  4023-        "  0/'.  (it.,  p.  4038.       s  Of.  cit.,  p.  47 11. 
-'  ( '/.  < //.,  p.  4033.        ♦  Of.,  cit.,  |>.  4709. 


•^^^:^^^m 


The  Civil  War  Incvmc   Ta\ 


461 


lieve  that  if  you  want  to  make  this  tax  so  odious  so  that  dur- 
ing another  war  you  can  never  levy  such  a  tax,  you  had  better 
icnew  it ;  and  then  I  assure  you.  you  will  never  ho  able,  even 
in  that  crisis,  to  establish  or  levy  it  a^ain.  " '  And  later  on  he 
said:  "if  this  tax  is  re-enacted,  the  Republican  partv  mi^jht 
as  well  put  on  its  winding  sheet." '•'  Huckin-hani  objected 
to  the  tax  on  the  ground  that  owing  to  the  piiMiiity  of  the 
returns,  people  were  virtually  compelled  to  pay  on  more 
incomes  than  they  possessed  in  order  to  bolster  up  their 
credit.''  Thurman  found  fault  with  it  on  the  remarkable 
ground  that  an  income  tax  is  shifted,  and  is  finally  paid  by 
the  poor.  Yat.'s  contended  that  the  law,  "with  its  frauds, 
its  inquisitorial  character,  its  cheats,  its  deceptions  by  which 
the  honest  man  paid  and  the  dishonest  escaped,  should  be 
blotted  from  the  American  statute  book  as  you  would  efface 
a  blot  upon  the  flag  of  the  Nation."*  Paterson  quoted  from 
Gladstone's  speech  of  1853,  in  order  to  elucidate  what  lie  con- 
sidered the  inevitable  frauds  of  an  income  tax.'^ 

On  the  other  hand,  there  were  not  lacking  defenders  of  the 
tax.  Among  the  warmest  advocates  was  Sherman,  who  de- 
clare<l  that  there  was  an  imperative  necessity  for  retaining  the 
income  tax,*  and  who  even  objected  to  any  increase  of  the 
exemption.  He  contended  that  on  the  score  of  inquisition 
the  income  tax  was  not  inferior  to  the  property  tax,  and  he 
maintained  that  "property  is  not  a  proper  test  of  taxes."  ^ 
Tointing  out  that  in  Kngland  the  income  tax  had  come,  in  his 
opinion,  to  stay,  he  denied  that  the  count.y  was  pledged  not 
to  renew  the  tax,  holding  that  the  limitation  to  the  year  1X70 
was  originally  in.serted  "  not  for  the  purpose  of  binding  Con- 
gress again.st  the  reenactment  of  the  income  tax,  but  rather 
as  an  introduction  of  opinion  that  we  should  levy  it  for  that 
timo.  It  was  a  guarantee  to  the  bondholders  that  for  that 
time  at  least  they  should  have  the  security  of  the  income 
tax."*     Morton,  referring  to  the  "demoralization  "  argument, 


*  Ot.  <■//.,  p.  4717. 
'  Op.  c.t..  p.  481 1. 


*  ('/.  cit.,  p.  4897. 
''  ('/.  at.,  p.  50S6. 


■'  Op.  cit.,  p.  4714. 
'  op.  ill.,  p.  4715. 


'ill 


462 


The  Income  Tax 


P>E 


ill 


contended  that  it  was  equally  applicable  to  all  existing  prop- 
erty taxes,  and  stated:  "I  have  no  respect  for  thai  argument; 
not  a  bit."  Coming  back  to  the  old  claim  that  New  York 
paid  one-third  of  the  taxes,  he  said  :  "  I  should  be  very  will- 
ing to  exchange  with  New  York  and  agree  that  we  would 
take  he.  incomes  and  pay  her  taxes.  .  .  .  They  have  to 
pay  the  income  tax  simply  because  the  large  incomes  are 
there.  .  .  .  What  kind  of  an  argument  is  that?  '  '  He  con- 
cluded :  "  I  have  not  heard  an  argument  against  the  income 
tax  that  had  any  force  in  it  that  was  not  stronger  against 
every  other  kind  of  taxation  than  the  income  tax."^  Cragin, 
a  little  later,  said,  "  I  know  very  well  that  the  argument  is 
that  this  tax  is  unequal  and  inquisitorial,  etc. ;  ',.  t  when  all 
the  froth  of  words,  all  the  wealth  of  rhetoric  is  swept  away 
on  this  subject,  the  real  objection  to  this  is  the  payment  of 
the  money,  and  nothing  more."^ 

The  opinion  on  the  whole,  liowever,  seemed  i  be  adverse 
to  the  continuance  of  the  tax,  and  the  Senate,  sitting  as  a  com- 
mittee of  the  whole,  decided  to  strike  out  the  house  income- 
tax  provision  by  a  vote  of  34  to  23.  In  the  meantime,  how- 
ever, the  impending  deficit  turned  out  to  be  larger  than  had 
been  anticipated,  and  with  tb-s  additional  gap  reached  an 
alarming  figure.  The  question  how  to  make  good  the  defi- 
ciency was  now  referred  to  the  committee  on  finance  for 
further  consideration.  Sherman,  the  chairman  of  the  com- 
mittee, reported  that  since  the  income  tax  had  been  aban- 
doned, he  would  suggest  the  restoration  of  the  tax  on  gross 
receipts  and  on  sugar.  The  committee  of  the  whole  was  at 
first  not  willing  to  accept  those  suggestions,  but  later  on 
decided  to  adopt  them  in  part,  at  all  events,  so  far  as  the 
duties  on  sugar  were  concerned.  When  the  bill  came  out  of 
committee,  Wilson  moved  to  continue  the  income  tax  at  the 
reduced  rate  of  two  and  one-half  per  cent  for  two  years  ;*  but 
this  was  rejected,  as  was  a  similar  motion  of  Warner  that  the 
tax  should  be  continued  only  as  a  tax  on  the  income  from 

'  Op.  cit.y  p.  4759.  "  op.  cit.,  p.  5085. 

»  op.  dt.,  p.  4760.  *  Of.  cit.,  ji.  50S5. 


The  Civil  War  Income   Tax 


463 


capital.i  On  July  i  the  amendment  striking  out  all  the  pro- 
visions relating  to  income  tax  was  adopted  by  the  Senate,  by 
a  vote  of  26  to  22.  Sherman  thereupon  moved  to  restore  the 
tax  on  gross  receipts,  stating  that  he  did  not  believe  that  "  there 
were  many  taxes  on  the  tax  list  worse  than  the  tax  on  gross 
receipts,"  but  contending  that  it  was  absolutely  necessary  to 
prevent  a  deficit.  His  motion  was  lost  by  a  tie  vote,  and  the 
question  now  arose  what  was  to  be  done.  Several  of  the  sen- 
ators who  had  voted  against  the  retention  of  the  income  tax  in 
the  expectation  that  the  tax  on  gross  receipts  would  be  restored, 
found  themselves  in  a  quandary.  Anthony  declared  that  he,  as 
well  as  some  of  his  colleagues,  was  ready  to  reconsider  the 
vote  if  the  choice  should  lie  between  an  income  tax  and  a 
gross  receipts  tax,  as  they  much  preferred  the  former.^  Ac- 
cordingly, the  whole  matter  was  reconsidered  by  a  vote  of  26 
to  25.  Wilson  now  repeated  the  amendment,  which  had  orig- 
inally been  voted  down,  and  this  time  it  was  carried  by  a  vorc 
of  27  to  21.3 

But  the  fight  was  not  yet  over.  Sumner  stated  that  the  war 
and  the  income  taxes  were  wedded  together,"  while  Edmonds 
declared  that  the  decision  was.  after  all,  a  choice  between 
evils.«  Senator  Bayard  attempted  to  extend  the  two-thousand- 
dollar  exemption  to  the  tax  on  interest  and  dividends,  but  did 
not  succeed.  The  enemies  of  the  tax  brought  the  matter  up. 
through  a  motion  to  strike  out,  and  came  within  an  ace  of 
accomplishing  their  result,  the  motion  being  lost  by  a  tie  vote 
of  26  to  26. 

During  the  discussion  Sherman  really  bore  the  yeoman's 
part.  But  for  him  there  is  little  doubt  that  the  tax  would 
have  been  repealed  at  once.  In  his  speech  of  May  23  he 
went  into  the  subject  at  great  length.e  Contending  that  the 
income  tax  "  was  sustained,  by  principle,  by  writers  of  political 


»  Op.cit.,  p.  5101 


'  Op.  cil.,  p.  5082.  8  Of.  cil.,  p.  5099. 

*  Op.  ,il.,  p.  5098.  «  op.  a/.,  p.  5100. 

«  The  speech  is  reprinted  in  Sfluf^.^  .Sp/e>/u-s  ami  A\fo,-/s  on  Finame  and 
Taxation  from  jSj^  Io  /S7S.     By  j,.hn  Sherman.     New  York.  1879,  pp.  284  ft 


II' 


11 


!'l!! 


10 


ItJ 


464 


The  Income  Tax 


economy,  by  the  experiences  of  Great  Britain,  and  that  it  was 
the  most  just  and  equitable  tax  levied  by  the  United  States," 
he  pointed  out  that  England  had  been  able  to  diminish  the 
burdens  resting  upon  consumption  only  through  the  imposition 
of  the  income  tax,  and  he  stated  that "  the  only  discrimination 
in  our  tax  laws  that  will  reach  wealthy  men  as  against  the 
poorer  classes,  is  the  income  tax.  .  .  .  According  to  every 
true  theory  of  taxation,  a  large  part  of  the  taxes  ought  to  fall 
upon  property  or  income  derived  from  property."  *  He  main- 
tained that  under  the  old  law  "  every  year  the  income  tax  is 
increasing,  although  the  actual  income  of  the  country  is  dimin- 
ishing. Every  year  that  the  law  is  enforced,  we  are  getting 
nearer  to  an  accurate  income  tax."  ^  After  qi'oting  a  state- 
ment from  Professor  Perry,  of  Williams  College,'  that  "  the 
income  law  at  present  in  force  in  the  United  States  has,  per- 
haps, been  subject  to  less  complaint  than  the  manufacturers' 
tax  and  other  forms  of  indirect  taxation,  and  it  has  become 
more  and  more  productive  every  year,  as  the  forms  are  per- 
fected," he  concluded:  "If  I  had  my  way,  I  would  retain  the 
income  tax  at  five  per  cent  on  all  incomes  above  one  thou- 
sand dollars,  making  such  modifications  as  would  afford  the 
proper  exemptions,  and  then  throw  off  these  taxes  upon 
consumption  that  oppress  the  poor  and  take  coppers  out 
of  the  dollars  of  the  people  who  earn  them  by  their  daily 
work."  * 

Neither  the  Senate  nor  the  country  at  large,  however,  was 
ready  to  accept  these  advanced  views,  and  although  the  tax 
was  now  continued,  it  was  expressly  limited  to  the  years  1870 
and  1 87 1,  "and  no  longer."'  The  tax  was  imposed  at  the 
r?'^e  of  two  and  one-half  per  cent  on  all  incomes  over  two 
thousand  dollars,  and  the  law  included  several  important 
administrative   changes.      In   the   first  place,  returns    were 


'  op.  cit.,  p.  297.  *  Op.  at.,  p.  304. 

'  Poliliail  Economy.     By  Arthur    L.  Perry,  p.   44.1.     The  first   editior\   was 
published  in  1865. 
«  op.  at.,  p.  305. 
"  Act  of  July  14,  1S70,  c.  LcU.,  sec.  6. 


Tlte  Civil  War  Income  Tax 


465 


i 


henceforth  to  be  required  only  of  those  who  had  an  income 
of  more  than  two  thousand  dollars.  Second,  no  official 
should  "  permit  to  be  published,  in  any  manner,  such  income 
returns  or  any  part  thereof,  except  such  general  statistics  not 
specifying  the  names  of  individuals  or  firms,  as  he  may  make 
public  under  such  rules  and  regulations  as  the  commissioner 
of  Internal  Revenue  shall  prescribe."  ^  Third,  the  assessor 
was  not  allowed  to  increase  the  amount  of  any  one's  assess- 
ment without  due  notice  to  th.;  party.  P^ourth,  no  penalties 
were  to  be  imposed  upon  any  one  for  neglect  or  refusal  to 
make  returns,  or  for  false  or  fraudulent  returns,  except  after 
reasonable  notice  of  the  time  and  place  appearing  so  as  to 
give  the  person  charged  an  opportunity  to  be  heard. 

The  above  provisions  applied  to  the  inc<jme  tax  proper. 
With  reference  to  the  tax  on  salaries  and  on  government 
dividends,  however,  there  was  a  curious  confusion.  Although 
all  these  taxes  had  been  first  imposed  by  the  law  of  1862,  the 
period  covered  by  the  assessment  differed.  The  income  tax 
proper,  it  will  be  remembered,  was  always  assessed  on  the 
income  of  the  previous  year,  while  the  tix  on  salaries,  interest, 
and  dividends,  was  levied  as  these  were  paid  or  became  due. 
As  the  law  of  1862  went  into  force  on  August  i,  interest, 
dividends,  and  salaries  were  taxed  only  from  that  date,  while 
the  tax  on  incomes  in  general  was  assessed  on  incomes 
received  during  the  whole  of  the  preceding  year.  This  dis- 
parity was  pointed  out  several  times  during  the  discussions  of 
1870.2  As  a  consequence,  when  the  Senate  originally  voted 
that  the  income  tax  proper  was  to  end  in  1870,  it  also  voted 
to  prolong  the  tax  on  interest,  dividends,  and  .salaries  until 
August  I,  1870,  in  order  to  bring  harmony  between  the  two 
parts  of  the  law.  When,  however,  it  was  finally  decided  to 
contmue  the  income  tax  beyond  1870  the  original  disparity 
was  lost  sight  of,  and  it  was  decided  that  the  tax  on  interest, 
dividends,  and  salaries  should  be  levied  only  "during  the 
year  1871."  The  result  of  this  whole  situation  was  that  the 
old  five  per  cent  tax  on  dividends  and  salaries  continued  until 

'  •'^e>;-  '>■  ^  c/.  t^..  Of.  cit ,  p.  5090. 

3H 


lii' 


\\ 


a 


466 


The  Income   Tax 


August  I,  1870,  and  that  the  new  tax,  at  a  rate  of  two  and 
one-half  per  cent,  was  levied  only  during  the  year  1871,  with 
an  interregnum  from  August  i  to  December  31,  1870. 
With  the  close  of  1870  the  tax  on  Uries  and  dividends 
ceased,  while  the  rest  of  the  income  tax  was  still  assessed 
in  1872,  although  only  on  the  income  of  1871. 

The    fiscal    situation    of   the   country   was   improving   so 
rapidly,  especially  during  the  period  of  rising  prices  which 
preceded  the  crisis  of  1873,  that  the  income  tax  seemed  to  be 
no  longer  required.     No  one  ventured  to  propose  its  continu- 
ance after  1872,  and  in  fact,  an  effort  was  made  during  1871 
to  repeal  it  at  once.     A  bill  to  this  effect  was  introduced  into 
the  Senate  and  led  to  som<"  discussion.     Scott,  on  January  25, 
1 87 1,  called  attention  to  the  fact  that  only  94.333  persons  in 
the  entire  population  of  the  United  States  paid  their  income 
tax  and  that  in  one-tenth  of  all  the  congressional  districts  in 
the  county  not  a  single  cent  was  collected.     He  said  that  he 
had  inquired  of  the  commissioner  of  internal  revenue  as  to 
what  diminution  could  be  made  in  the  expenses  if  the  income 
tax  were  repealed,  and  he  had  received  the  answer  that  five 
hundred  assistant  assessors,  at  a  salary  of  five  dollars  a  day, 
could  be  dispensed  with.     "  Now,"  asked   he,  "  is  it  worth 
while  to  keep  up  an  expenditure  of  $250x3  a  day  for  these 
few  thousand  taxpayers.'     Is  not  the  absurdity  of  the  adn'-'n- 
istration  of  this  income  tax  apparent  upon  the  very  syste  1  ? 
Does  any  man  believe  that  if  he  were  to  take  up  the  assc  ;s- 
ments  of  real  and  personal  estate  in  the  cities  of  New  Yc  -k 
i-^  Philadelphia,  he  would  find  that  there  are  not  94,000  peo- 
,  in  these  two  cities  alorie  who  have  an  income  e.xceeding 
J82000  ? "  1     Sherman,  however,  came  to  the  defence  of  the 
tax  in  a  powerful  speech.^     He  claimed  that  "any  modifica- 
tion or  reoeal  of  the  income  tax  should  be  postponed  until, 
by  a  general  revision  of  cur  whole  revenue  system,  we  can 
determine  what  ta.xes  bear  most  heavily  upon  the  people,  and 
distribute  the  reduction  so  as  to  give  them  the  greatest  relief." 

1  CoitgrenioniH  Glohe,  41st  C'ligress,  ji/  Sfssion,  p.  722. 
•^  It  IS  also  louncl  in  his  Sfiechd  Speeches,  p.  JI7  ri  iei/. 


'^^m- 


The  Civil  War  Income  Tax 


407 


:   -I 


He  considered  the  taxes  on  the  necessaries  of  life,  and  espe- 
cially upon  sugar,  tea,  and  coffee,  to  be  far  inferior  to  the  in- 
come tax,  and  he  proceeded  to  discuss  the  objections.  The 
first  was  "  that  it  authorizes  espionage  into  a  man's  business." 
"  Well,  sir,  so  do  all  taxes,"  he  answered.  No  custom  house 
laws  can  be  enforced,  for  instance,  unless  this  espionage  is 
allowed.  Furthermore,  he  said  there  was  not  a  state  in  the 
Union  which  through  its  general  property  tax  did  not  au- 
thorize more  espionage  in  a  man's  private  affairs  than  did 
the  income  tax.  He  pointed  out  that  "  in  reframing  the  law 
we  struck  out  nearly  all  its  c  ffensive  provisions,  and  perhaps 
weakened  its  force  by  this  anxiety  to  avoid  the  charge  of 
espionage."  What  was  left,  he  thought,  was  mild  compared 
with  the  practice  of  the  personal  property  tax  in  Ohio.  In 
the  next  place,  he  stated  :  "  We  are  told  that  this  is  an  odious 
and  unpopular  tax.  I  never  knew  a  tax  that  was  not  odious 
and  unpopular  with  the  people  who  paid  it."  The  opinion 
that  the  tax  was  unconstitutional,  he  brushed  aside  scornfully, 
as  something  that  was  not  entertained  by  any  good  lawyer. 
Finally,  referring  to  the  statement  that  the  income  tax  was 
expensive  to  collect,  he  answered,  "  Instead  of  its  being 
an  expensive  tax,  it  is  the  cheapest  tax  collected  by  the  na- 
tional government  from  internal  revenue,  except  the  tax  on 
banks." 

Sherman,  however,  was  unable  to  persuade  the  Senate, 
which  decided  by  a  vote  of  26  to  25  to  repeal  the  income  tax 
at  once.  When,  however,  the  bill  reached  the  House  it  was 
returned  on  the  ground  that  revenue  measures  could  not 
originate  in  the  Senate.^  Nothing,  therefore,  came  of  the 
proposition  to  repeal  the  income  tax  at  once,  although  a 
similar  bill  that  had  been  introduced  in  the  House  by  Hooper 
on  February  7  was  also  defeated  by  a  vote  of  105  to  104.^  The 
income  tax  was,  however,  allowed  to  die  a  natural  death  and 
expired  by  limitation  in  1872. 

In  forming  a  judgment  on  its  disappearance,  several  points 

>  Congressional  Globe,  41st  Congress,  3d  Session,  p.  791. 
"  O/.  .•.•/,  p,  J087. 


1  i  1 


it^ 


U  i 


I!   I  i 


468 


The  Income  Tax 


must  bo  considered.  It  was  too  much  to  expect  that  a 
country  which  did  not  even  have  a  system  of  internal  revenue 
at  the  outbreak  of  the  war  should  be  willing  to  retain  so  bur- 
densome an  impost  after  the  fiscal  exigency  had  disappeared. 
The  situation  at  the  beginning  of  the  seventies  in  the  United 
States  was,  in  fact,  far  more  unfavorable  to  the  retention  of 
an  income  tax  than  was  the  English  situation  in  1816.  In 
lingland  there  existed  at  the  time,  not  only  a  protective  tariff 
far  higher  than  that  in  force  in  the  United  States  at  the  later 
period,  but  the  English  fiscal  system  was  furthermore  charac- 
terized by  the  corn  laws  which  did  not  exist  in  the  United 
States,  and  by  a  multiplicity  of  excises  or  internal  revenue 
taxes  which  were  fast  being  swept  away  in  America.  Neither 
England  in  1816  nor  the  United  States  in  1870  was  ready  for 
a  consideration  of  the  broader  social  aspects  of  the  income 
tax  which  have  come  to  the  front  in  recent  year^i.  Since  the 
problem  was  exclusively  fiscal  in  character,  the  retention  of 
the  income  tax  at  that  time  in  the  United  States  was  decidedly 
less  urgent  than  at  the  earlier  period  in  England.  Even  if 
Sherman  s  arguments  had  prevailed,  the  income  tax  would 
have  been  reasonably  sure  to  disappear  as  soon  as  the  revenue 
to  be  derived  from  the  internal  revenue  system  had  shrunk 
to  its  normal  status  of  the  amount  raised  from  the  tobacco, 
beer,  and  whiskey  taxes  as  they  came  to  exist  during  the 
eighties.  One  of  the  great  lessons  taught  by  the  Civil  War 
was  the  necessity  of  having  an  internal  revenue  system  side 
by  side  with  the  customs  duties ;  but  when  these  internal 
cu.xes  imposed  on  a  very  few  commodities  supplied  all  the 
ne'^essary  revenue  that  was  not  yielded  by  the  tariff,  and  when 
the  problem  became  one,  as  it  did  before  long,  of  surplus 
rather  than  of  deficit  financiering,  all  thought  of  an  income 
tax  would  have  been  vain.  Whether,  therefore,  the  income 
tax  was  to  disappear  in  1872  or  in  some  subsequent  year,  the 
fact  that  it  was  destined  to  disappear  is  undoubted.  The  chief 
reason  why  it  did  not  continue  is  not  so  much  because  of  the 
objections  raised  by  its  opponents,  as  the  simple  fact  that  it 
was  not  needed  for  revenue  purposes. 


The  Civil  War  Income  Tax 


469 


• « I?- 


§  t.    The  Practical  Working  of  the  Income  Tax 

In  considering  the  actual  operations  of  the  income  tax 
during  the  Civil  War  period,  attention  should  be  directed  to 
three  fundamental  points  :  First,  what  was  the  interpretation 
put  upon  the  provisions  of  the  law  by  the  administrative  of- 
ficials ?  Second,  what  was  the  fiscal  significance  of  the  tax  as 
compared  with  the  total  revenues?  And  third,  what  were 
the  shortcomings  of  the  system  ? 

The  interpretation  of  the  law  was  chiefly  the  work  of  the 
commissioner  of  internal  revenue.  His  decisions  were  in 
most  cases  final,  and  but  little  recourse  was  taken  to  the 
courts.  Amid  the  manifold  decision.s,i  attention  will  here 
be  directed  only  to  a  few  of  special  importance.  So  far  as 
concerns  the  question  of  what  constitutes  income,  it  was  de- 
cided at  an  early  period  that  legacies  are  not  income,  but 
that  gifts  of  personal  property  made  ante  morttin  should  be 
so  considered.^  In  the  same  way,  amounts  received  on  life- 
insurance  policies  were  not  deemed  income,''  while,  on  the 
other   hand,   the   premiums   paid   on    life-insurance   policies 

*  The  tiecisions  began  to  be  publisheil  in  1865,  in  a  volume  cntitle<l  Thi'  In- 
ternal Rrenue  Kecorder  and  Customs  fournal.  With  tht,-  secoml  vuluint-  (  luly, 
•  865)  the  name  was  changed  to  tlie  Internal  Ke7'enue  Kccurd  and  iuitniis 
Journal.  The  most  convenient  summ.iry  of  the  decisions  up  to  1870  will  he 
found  in  the  Internal  Revenue  Statutes  now  in  force  uilh  Notes  referring  to  all 
Decisions  of  the  Courts  and  De/iartmental  Rulings,  Circulars,  and  Instructions 
reported  to  October  r,  iSyo.  l!y  Orlando  1'.  liumii.  New  York,  1870,  jip.  283-305. 
A  shorter  summary  will  be  found  in  Foster  and  Abliot,  ./  I'reatise  on  the  federal 
Income  Tax  under  the  Act  of  iSq4.  Hoston,  1895.  For  the  instructions,  forms, 
regulations,  etc.,  see  Charles  F.  Estee,  I'he  Excise  Tax  /.aw,  appearing  July 
1, 1S62 ;  and  all  the  .4mendments,  together  uith  the  Instructions  and  lUank 
forms.  Decisions,  and  Regulations  of  the  Commissioner,  with  Jul!  .Marginal 
Notes  and  References.  The  first  edition  of  this  was  jmblished  in  1S63.  (/  aUo 
a  similar  work  of  A.  A.  Redlielci,  .•/  Hand- Hook  of  the  United  .States  Tax  /.aw, 
with  all  the  Amendments,  comprisint:  the  Decisions  of  the  Commissioner  of  /«- 
ternal  Revenue  together  with  Copious  .Wtes  and  f.xplanation.  Xcw  York,  1S63, 
and  in  lubsequent  years;  and  Boutwell's  work  mentioned  supra,  p.  430,  which 
was  iuued  in  various  editions. 

^  J  Internal  Revenue  Record,  p.   133.     This  will  hereafter  be  referred  to  as 


■#! 


/.  R.  R. 


!■•  y>- 


470 


Tlu  Income  Tax 


were  not  allowed  as  deductions.  When,  however,  an  indi- 
vidual received  an  annuity,  the  payment  of  the  legacy  or 
succession  tax  on  the  annuity  did  not  relieve  the  annuitant 
from  liability  to  income  tax  on  the  annuity.*  The  salaries  of 
state  officials  were  at  first  declared  liable  to  the  income  tax,' 
but  this  decision  was  later  on  reversed  by  the  courts,  and  the 
salary  of  a  judge  of  a  state  court  was  subsequently  declared 
not  liable  to  income  tax.'' 

So  far  as  exemptions  were  concerned,  it  was  held  that  hus- 
band and  wife  were  to  be  regarded  as  members  of  the  same 
family,  although  living  apart,  unless  separated  by  divorce  or 
other  operation  of  the  law,  so  as  to  break  up  the  family  rela- 
tionship. Minor  children  and  parents  were  also  to  be  con- 
sidered members  of  the  same  family,  whether  living  together 
or  not.*  In  reference  to  deductions,  the  most  important 
questions  arose  under  the  head  of  losses,  repairs,  and  depre- 
ciation. Although  losses  incurred  in  the  prosecution  of  one 
kind  of  business  might  be  deducted  from  the  gains  in  an- 
other, assessors  were  warned  to  be  especially  careful  not  to 
allow  such  deductions  when  in  reality  they  should  be  re- 
garded as  investments  or  expenditures;^  and  it  was  held, 
furthermore,  that  no  deduction  should  in  any  case  be  allowed 
for  depreciation  in  the  value  of  stocks  or  other  property  un- 
less they  were  actually  disposed  of,  and  a  loss  realized.^ 
Repairs,  moreover,  were  sharply  distinguished  from  perma- 
nent improvements.  The  increased  value  given  to  a  building 
by  permanent  improvements  was  to  be  charged  to  capital,  not 
to  income  account.  Repairs  were  interpreted  to  include  only 
those  improvements  which  served  merely  to  prevent  the  prop- 
erty from  becoming  useless  or  depreciating  in  value,  and  re- 
pairs were  not  to  be  confused  with  betterments.'  Under  these 
and  similar  rulings,  the  laws  gradually  acquired  a  more  pre- 
cise meaning,  and  the  number  of  cases  submitted  for  the 


"^4  1.  R.  R.,  p.  4- 


^7  T.  R.  R.,  p.  6o. 

♦  7  /.  R.  R.,  p.  59. 

•  J  I.  R.  R..  p.  log:   7  /.  R.  R.,  p.  e,(). 

'  ^  /.  A'.  R.,  p.  61  ;  ^  /.  R.  R.,  p.  130  ;  7  /.  R.  R.,  p.  758. 


»  //  /.  R.  R.,  p.  205. 
^S  I  K.R.,  p.  140. 


The  Civil  War  Income   Tax 


471 


decision  of  the  commissioner  of  internal  rcvcnuo  bc-)(an  to 
decline. 

In  the  second  place  let  us  consider  the  fiscal  results  of  the 
tax.  The  income  tax  law,  as  in  fact  the  whole  code  of 
internal  revenue,  was  very  slow  in  producing  results.  An 
entirely  new  machinery  had  to  be  created,  and  it  took  some 
time  before  this  machinery  got  into  working  order.  One  of 
the  strongest  arguments  for  the  permanent  retention  of  the 
internal  revenue  system  by  the  federal  government  was  pre 
cisely  this  delay  in  securing  any  returns.  It  is  entirely  j)rob 
able  that  had  an  internal  revenue  system  existed,  even  in 
skeleton,  at  the  outbreak  of  the  war,  the  financial  history  of 
that  period  would  have  been  very  different,  and  we  should 
have  been  spared  the  necessity  of  using  legal  toiders  with 
their  train  of  disaster  and  annoyance  until  the  resumption  of 
specie  payments.  Because  of  the  absence  of  any  such  ma- 
chinery, it  was  several  years  before  the  income  tax  yielded 
its  normal  revenue.  The  collections  in  1863  were,  in  round 
numbers,  only  about  two  millions;  in  1864,  about  twenty 
millions;  while  tl»ey  increased  in  1865  to  thirty-two  millions, 
and  reached  in  1866  the  sum  of  almost  seventy  three  millions.' 
The  large  figures  of  1866,  however,  were  due  wA  only  to 
the  increased  rates,  but  to  the  ri.se  of  prices  which  attended 
the  inflation  of  the  currency.  In  1867  the  revenue  fell  to 
sixty-six  millions,  due  in  part  to  the  contraction  of  the  cur- 
rency, but  also  in  part  to  the  fact  that  after  the  war  was 
over  the  payment  of  the  tax  did  not  ap|)eal  so  strongly  to  the 
patriotic  motives  of  the  citizens.  In  1868  the  revenue  fell 
to  forty-one  millions,  owing  to  the  decrease  of  the  rates, 
while  after  the  law  of  1870  went  into  ojjcration  the  revenue 
fell  to  nineteen  millions  in  1871  and  to  fourteen  millions 
in  1872. 

To  the  income  tax  proper,  including  the  tax  on  dividends 
and  interest  of  corporations  and  the  tax  on  salaries,  lliere 
ought  really  to  be  added  the  tax  on  the  gross  receipts  of 
corporations.     This  was  not  considered  a  part  of  the  income 


'f 


•M 


J  tor  a  full  statement  ol  the  returns,  sec  aj.jjt  n  ;ix  at  liie  en 


uf   lil 


b   t-ilklJJLCI. 


ii^ 


472 


The  Income  Tax 


Wi 


tax  because  in  law  gross  receipts  are  distinguishable  from 
income.  Hut  in  reality  the  tix  on  dividends  and  interest  was 
a  tax  on  the  income  of  the  security  holder,  although  stopped 
at  the  source,  while  the  tax  on  gross  receipts  was  supposed 
to  hit  the  ability  of  the  corporation  itself.  In  most  of  the 
foreign  income  taxes  at  present  the  tax,  as  we  know,  is  im- 
posed upon  inc(mies  both  of  individuals  and  of  corporations, 
even  though  in  some  cases  an  arrangement  is  made  to  avoid 
double  taxation  by  taxing  personal  incomes  from  corporate 
securities  only  on  the  surplus  over  a  certain  percentage. 
These  taxes  on  gross  receipts  amounted  to  alxjut  three  and  a 
half  millions  in  1SO4,  and  reached  the  maximum  of  over 
eleven  millions  in  1866.  Kven  without  the  gross  receipts 
tax,  however,  the  income  tax  was  a  very  important  part  of 
the  whole  system  of  internal  revenue.  In  1866  when  the 
income  tax,  as  we  have  seen,  yielded  about  seventy-three 
millions,  the  total  internal  revenue  was  about  three  hundred 
and  eleven  millions.  The  income  tax  thus  produced  a  little 
less  than  one-fourth  of  the  entire  revenue.  While  the  pro- 
portion was  not  quite  so  high  in  the  other  years,  it  did  not 
differ  very  materially.  As  a  fiscal  expedient,  therefore,  the 
income  tax  must  be  declared  to  have  been  in  its  prJme  a 
decided  success. 

The  various  states,  of  course,  contributed  very  unequally 
to  this  result.  New  York,  for  instance,  paid  about  one-third 
of  the  entire  tax,  its  percentage  ranging  in  the  successive 
years  from  about  twenty-nine  to  thirty-nine  per  cent.  Nexi 
came  Pennsylvania  and  Massachusetts,  which  paid  respec- 
tively from  thirteen  to  fifteen  per  cent,  and  from  ten  to  four- 
teen per  cent.  Then  followed  at  a  respectful  distance  Ohio, 
with  four  to  eight  per  cent ;  Illinois,  three  to  six  per  cent ; 
New  Jersey,  three  to  five  per  cent;  and  California,  three  to 
five  per  cent.^  In  considering  these  figures  it  must  be  re- 
membered that  the  returns  from  the  southern  states  were 
utterly  insignificant  in  the  early  years  because  of  the  war, 
and  in  the  later  years  because  of  the  devastations  caused  by 

•  The  exact  figures  '.vili  hz  fuunci  in  table  lii  at  the  end  of  this  chapter. 


The  Civil  War  Income   Tax- 


Mi 


the  war.  The  same  caution  applies  to  the  tuimbcr  tit  pci.-.oiiH 
assessed.  The  figures  in  reference  to  this  were  not  puhlislieil 
until  1867,  and  from  this  period  up  to  1870  tin-  minihiT  of 
persons  assessed  varied  from  254,000  to  276,mK).'  After 
the  fjreat  increase  of  exemptions  ;ind  the  inereasiiin  lenii-my 
of  administration  in  1870,  the  numbers  fell  to  74,ikxj  and 
72,000  in  1 87 1  and  1872. 

When  we  come  to  inquire  as  to  how  far  the  income  tax 
was  really  successful  in  reaching  the  incomes  that  ou^ht  to 
have  been  assessed,  we  enter  upon  ,1  rather  difficult  fuld  ot 
inquiry.  During  the  years  that  the  war  was  in  prognss  it  is 
reasonable  to  assume  that  the  tax  was  levied  with  comparative 
success.  Wc  must  not  forget  the  very  optimistic  statement 
of  Morrill  quoted  above;*  and  even  if  allowance  be  made  for 
so  rose-colored  a  view,  the  tax  cannot  be  loiisidcred  a  failure. 
After  the  war  was  over,  however,  the  situation  changed 
considerably.  Senator  Sherman,  i"  '  1,  tells  us  that  the 
machinery  of  the  law  worked  more  si  ssfully  from  year  to 
year.*  But  unfortunately  his  testimoi.y  is  contradicted,  not 
only  by  the  diminution  of  the  yield  in  the  face  of  increasing 
wealth  and  population,  but  also  by  the  common  repute  in 
which  the  tax  was  held.  Frauds  and  evasions  multipi  1  on 
every  hand  until  in  the  closing  years  the  honest  taxpayer 
almost  became  the  laughing-stock  of  his  fellow  citizens  —  a 
situation  quite  comparable  to  that  which,  as  we  have  seen, 
is  found  in  Italy  to-day.  Before,  however,  i)rocecdiiig  to 
analyze  the  reasons  for  this  failure,  il  must  be  stated,  in 
common  fairnes.s,  that  the  federal  income  tax,  notwithstand- 
ing all  its  imperfections,  crudities,  and  ensuing  frauds,  was 
nevertheless  more  successful  than  the  general  i)ropertv  tax 
in  the  separate  states.  Let  us  test  this  by  taking  its  fortunes 
in  a  typical  state,  utilizing  the  returns  of  the  state  comptrol- 
ler and  the  federal  officials. 

The  special  income  tax  of  1865  was  levied  at  the  rate  of 
five  per  cent  on  all  incomes.     Its  yield  in  New  \'ork  state 

'  For  the  ilctailfil  figures  as  t(j  these,  see  taMe  II  at  the  enH  <jf  this  chapter. 

i^up..,,y.    ,45.  «    V;^..:,:.     .jf.;. 


474 


The  Incline  Tax 


was  58,765,914,  which  corresponds  to  an  income  of  5 175,3 18,- 
280.  The  state  assessment  for  the  general  property  tax  in 
that  year  disclosed  property  to  the  amount  ot  51,550,879,685. 
That  is,  the  self-assessed  incomes  in  New  York  amounted  to 
over  eleven  per  cent  of  the  property  — a  preposterously  high 
figure.  If  we  assume  that  the  average  rate  of  profit  at  that 
time  was  seven  per  cent,  the  income  on  New  York  property 
should  have  been  5108,561,578.  Yet  this  was  not  two-thirds 
ot  the  income  actuu'.ly  assessed.  The  income  tax  yielded  one- 
third  as  much  again  ai«  a  corresponding  property  tax.  Of 
course  some  allowance  should  be  made  for  incomes  from 
other  so  irces  than  property.  lUit  the  exemption  of  56oo  in- 
cluded almost  all  the  working  classes ;  and  the  profits  from 
business  are  practically  the  income  from  property  invested  in 
the  business.  So  that  the  only  class  for  which  an  allowance 
must  be  made  is  that  of  receivers  of  professional  incomes. 
The  total  income  of  this  class  is  not  large  enough  to  make 
any  material  difference  in  the  figures  given.  The  success  of 
the  income  tax  as  compared  with  the  local  property  tax  was 
due  in  part  to  the  fact  of  the  low  valuation  of  real  estate. 
But  its  main  cause  was  the  failure  of  the  state  tax  to  reach 
personal  property.  In  other  words,  the  federal  income  tax 
was  able  to  reach  many  of  those  who  contrived  to  escape  the 
personal  property  tax. 

The  other  years  disclose  a  similar  state  of  affairs.  In 
1 866- 1 867  the  income  tax  in  New  York  yielded  518,448,664. 
It  was  levied  at  the  rate  of  five  per  cent  and  ten  per  cent. 
Taking  this  as  approximately  equivalent  to  a  uniform  tax  of 
seven  and  one-half  per  cent,  the  result  would  be  a  real  income 
of  $245,982,187.  But  let  us  grant,  in  order  to  weaken  the 
contention  still  further,  that  it  was  tantamount  to  a  uniform 
tax  of  as  much  as  nine  :^er  cent  on  all  incomes.  That  would 
mean  an  income  of  only  205  millions.  The  property  assessed 
in  New  York  by  the  state  officials  is  returned  at  51,531,229,- 
636.  Even  assuming  that  the  rate  of  income  on  capital  was 
as  high  as  seven  per  cent,  we  would  have  an  income  of  $107,- 
186,074.     Yet  the  income  actually  returned  exceeded  this  by 


The  Civil  War  Income   Tax 


475 


nearly  lOO  millions.  Kven  under  the  least  favorable  showing 
incomes  appeared  as  more  than  thirteen  per  cent  of  property 
—  a  figure  manifestly  extravagant.  The  income  tax,  there- 
fore, produced  almost  twice  as  much  as  the  general  property 
tax.  And  even  if  we  make  the  same  allowance  as  before  for 
incomes  derived  from  other  sources  than  property,  the  dis- 
proportion would  still  be  very  considerable.  Kven  in  1S70, 
when  the  limit  of  exemption  had  been  increa.sed  .so  much  as 
materially  to  reduce  the  returns.  New  York  paid  S  10,420,035 
as  a  five  per  cent  income  tax.  This  corresponds  to  a  taxable 
income  of  5208,400,700.  The  assessment  of  i)roperty  for  the 
state  tax  was  5i,9<')7,ooi,i85.  This  would  mean  that  incomes 
were  eleven  per  cent  of  property,  which  for  that  period  is 
palp-'bly  far  too  high. 

1..  lort,  the  history  of  the  income  tax  clearly  shows  that 
it  Wa.,  more  lucrative  than  a  corresponding  property  tax,  and 
that  it  succeeded  in  many  cases  where  the  personal  property 
tax  failed.  The  federal  income  tax  was  indeed  productive  of 
great  frauds,  but  the  state  property  ta.\  created  far  more.  It 
was  precisely  because  the  income  tax  reached  so  many  of  the 
mercantile  and  capitalistic  classes  who  have  both  previously 
and  since  escaped  taxation,  that  it  became  unpopular  and  was 
abolished. 

In  other  parts  of  the  country,  indeed,  the  results  may  not 
have  been  quite  so  favorable,  because  of  the  more  primitive 
economic  conditions.  Where  the  value  of  tangible  realty  ex 
ceeded  that  of  personalty,  as  in  some  of  the  more  purely 
agricultural  states,  the  weakness  of  the  general  i)roperty  tax 
was  less  noticeable.  And  it  is  possible  that  in  such  cases  the 
federal  income  tax  yielded  less  than  a  property  tax.  But 
wherever  the  economic  conditions  approached  those  of  New 
York,  it  is  probable  that  the  results  worked  out  above  would 
find  their  counterpart  there. 

Even,  however,  if  the  federal  income  tax  worked  bett*.; 
than  the  state  general  property  tax,  it  must  be  confessed  that 
it  did  not  woi  k  \"z\\.  Let  v.s  in  conclusion  discuss  the  reasons 
for  this  comparative  failure. 


f 


\\\ 
If  i 
1 1  1 

If 


476 


The  Income  Tax 


\ 


§  7.  Conclusion 

The  shortcomings  of  the  system  may  be  summed  up  under 
four  heads :  mistakes  of  theory,  defective  provisions,  exag- 
gerated exemptions  and  administrative  methods. 

In  the  first  place,  the  theory  of  the  tax  itself  was  partly  a 
mistaken  one.  The  two  chief  forms  of  income  tax,  as  we 
know,  are  the  lump-sum  tax  and  the  stoppageat-source  tax. 
The  Civil  War  legislation  adopted  the  stoppage-at-source 
scheme  only  to  a  slight  extent,  applymg  it  only  in  the  case 
of  fet'^ral  salaries  and  of  the  securities  of  a  few  specified 
classes  of  corporations.  The  conditions  of  American  life  at 
the  time  would,  perhaps,  have  rendered  impossible  any  thor- 
oughgoing application  of  the  English  scheme.  But  there  is 
no  reason.why,  in  the  first  place,  the  stoppage-at-source  idea 
should  not  have  applied  to  all  corporations  instead  of  to  only 
a  few  classes;  and  second,  why  it  should  not  have  been 
appUed  to  the  salaries  of  corporate  employes  as  well  as  to 
the  income  from  corporate  securities.  Had  the  system  of 
stoppage  at  source  been  extended  even  in  these  two  directions, 
the  history  of  the  tax  would  have  been  a  very  differeni  one. 

In  the  second  place,  the  law  itself  was  very  confused  in 
parts  and  contained  mistakes  of  principle.  Surh,  for  in- 
stance, were  the  provisions  with  reference  to  the  rent  and 
rental  value  of  the  homesteads,  which  led  both  to  large  fraud 
and  to  considerable  diminution  of  revenue.  In  the  same 
category  of  errors  must  be  put  the  provisions  with  reference 
to  the  sales  of  real  estate,  and  the  details  as  to  farm  products 
which  rendered  the  administration  of  the  law  needlessly  com- 
plicated and  exceedingly  difficult.  As  to  profits  from  sales 
of  real  estate,  the  limitation  to  purchases  within  one  year  (or, 
later,  two  years),  was,  to  say  the  least,  arbitrary;  while  all  the 
embarrassments  connected  with  the  assessment  of  farmers' 
profits  might  have  been  avoided  by  the  adoption  of  the  Eng- 
lish system  of  basing  the  assessment  on  re.. tal  value,  — a  plan 
which  had  been  recommended,  as  we  know,  by  the  commis- 
sioner of  internal  revenue. 


,  it- 


The  Civil  War  Income  Tax 


477 


In  the  third  place,  the  exemptions  were  too  high.  Even 
if  we  concede  that  owing  to  the  different  scale  of  life  in  the 
United  States,  the  exemptions  ought  to  have  been  higher  than 
those  existing  in  England,  there  was  no  need  of  putting  the 
exemption  at  so  large  a  figure.  The  European  method  of 
abatement  or  of  progressive  diminution  in  the  amount  of  ex- 
emption is  far  preferable  to  the  method  followed  in  the  United 
States.  The  high  exemptions,  especially  after  the  amend- 
ment of  1870,  not  only  curtailed  the  revenue,  but  opened  the 
door  wide  for  evasion  and  fraud. 

Finally,  in  the  fourth  place,  the  administrative  methods 
were  inadequate.  It  would  indeed  be  too  much  to  expect 
under  the  existing  conditions  of  American  public  life  that  an 
exception  should  disclose  itself  in  the  income  tax.  But  if  good 
administration  is  necessary  anywhere,  it  is  doubly  necessary  in  so 
delicate  a  matter  as  the  assessment  of  incomes.  Every  one  was, 
indeed,  required  to  hand  in  a  return  of  his  income,  Ijut  it  was 
felt  on  all  sides  that  administrative  supervision  was  necessary. 
This  administrative  supervision,  however,  was  not  skilfully 
devised.  The  chief  defect  consisted  in  the  great  power  given 
to  the  assistant  assessors.  These  might  ask  any  questions 
they  chose,  and  might  compel  the  production  of  books.  It  is 
indeed  true  that  the  taxpayers  were  not  obliged  to  answer 
the  questions,  but  as  the  commissioner  of  internal  revenue 
stated,  a  refusal  to  do  so  might  lead  the  assessor  to  doubt 
the  correctness  of  the  return.  "  Experience  has  shown 
that  questions  are  a  great  convenience  in  refreshing  the 
memory  of  a  large  class  of  honest  taxpayers  who  are  not 
accustomed  to  keep  accounts,  and  who,  in  many  instances, 
cannot  recollect  all  the  sources  of  their  income  unless  they 
are  thus  reminded.  " '  But  the  questions  that  were  put  were 
not  always  of  this  character.  Moreover,  we  ar_  told  that 
"  the  destruction  or  disappearance  of  books  of  account  of  the 
persons  whose  returns  are  unsatisfactory,  is  an  event  which 
is  always  a  subject  of  just  suspicion.  It  is  hardly  possible 
to  give  a  credible  explanation  of  it ;  but  in  most   instances 

I  /  /.  A',  a'.,  p.  145. 


ill 


478 


The  Income  Tax 


m 


assessors  will  be  justified  in  assuming  that  it  is  prima  facie 
evidence  of  fraud,  and  treating  the  returns  accordingly."  * 

These  regulntions  would,  in  themselves,  perhaps,  be  unex- 
ceptionable, if  any  reliance  could  be  put  upon  the  assistant 
assessors.  Unfortunately,  however,  these  were  merely  under- 
lings, at  a  salary  of  a  few  dollars  a  day,  and  subject  to  all  the 
vicissitudes  of  politics  in  their  appointment  and  promotion. 
During  a  part  of  the  time,  at  least,  the  service  was  in  very  bad 
shape.  The  commissioner  of  internal  revenue  tells  us,  in  his 
report  for  1867,  that  "the  number  of  changes  which  have  oc- 
curred ;  jring  the  last  fiscal  year  in  the  personnel  of  the  service, 
exceeds  that  of  any  year  preceding,  there  being  on  the  average 
more  than  three  changes  even  of  assessors  and  collectors  in 
each  office,  during  the  year."  ^  In  the  following  year  the  com- 
missioner again  referred  "  to  the  antagonism  between  the 
legislative  and  executive  departments  which  has  so  sadly  dam- 
aged the  service  of  the  past  two  years." ^  Under  such  circum- 
stances, of  course,  good  administration  was  out  of  the  question. 

As  a  matter  of  fact,  the  American  system  was  inferior  to 
the  English  in  three  notable  respects.  First,  there  were  no 
representatives  of  the  taxpayers,  as  in  the  case  of  the  Eng- 
lish Land  Tax  Commissioners.  Secondly,  there  were  no  ex- 
pert and  high-class  men  to  do  the  work  of  assessment,  as  in 
the  case  of  the  English  Additional  Commissioners.  Third,  in 
the  abse.  ce  of  civil  service  reform. there  was  no  permanent 
tenure  of  office,  as  in  England.  It  is  not  to  be  wondered  at, 
therefore,  that  the  administration  was  so  poor.  The  assessors 
were  indeed  given  great  powers,  and  in  some  cases  they 
abused  these  powers  unmercifully,  while  in  others  they  suc- 
cumbed to  the  danger  of  bargains  or  compromises  with  the 
taxpayers.     The  situation  was  rendered  still  worse  by  the  pub- 

»//./".  A'.,  n.  145. 

2  111  twij  cases  there  were  four  ami  five  elianjjcs  in  each  (  "tice  respectively. 
In  114  districts  361)  separate  imlividuals  servcil  as  collectors,  and  in  116  districts 
370  persons  served  as  assessors.  —  Kefiort  of  the  Commissioner  of  Internal  Revenue 
for  the  year  1^67,  p.  xiv. 

^  Kepori  of  the  i'omtntaioner  of  Internal  Ke-venue  for  the   Yeiir  y  jcm',  p.  xviu. 


The  Civil  War  Income  Tax 


479 


licity  of  the  returns.  At  first,  indeed,  as  we  know,  the  com- 
missioner ruled  that  the  returns  should  be  secret,  but  in  de- 
fault of  any  legislation  Lo  that  effect,  the  pressure  for  publicity 
became  so  great  that  before  long  the  commissioner  instructed 
his  subordinates  to  publish  the  lists  "  in  order  that  the  amplest 
opportunities  may  be  given  for  the  detection  of  any  fraudulent 
returns  that  may  have  been  made."*  It  was  not  until  1870, 
it  will  be  remembered,  that  partial  secrecy  was  provided  by 
the  law. 


ii' 


* 

I 


Our  conclusion  as  to  the  Civil  War  income  tax,  therefore, 
is  that  it  was  partly  a  success  and  partly  a  failure.  From 
the  fiscal  point  of  view,  it  achieved  notable  results.  A  ta.x 
which  yielded  about  one-quarter  of  the  entire  internal  rev- 
enue of  the  country,  at  a  time  ./hen  every  additional  dollar 
was  of  the  utmost  importance,  mu'^t  be  declared  to  have 
contributed  not  a  little  to  the  suci  .ul  termination  of  the 
struggle,  and  to  the  adjustment  of  the  fiscal  difficulties  there- 
after. This  consideration  is  the  best  answer  to  those  who 
claim  that  a  federal  income  tax  is  not  needed  even  in  time 
of  war.  During  the  Civil  War  every  resource  of  the  govern- 
ment was  strained  to  the  utmost,  and  without  the  very  con- 
siderable assistance  afforded  by  the  income  tax  the  situation 
would  have  beea  far  different.  As  a  fiscal  engine,  the  income 
tax  must  be  pronounced  a  comparative  success. 

On  the  other  hand,  as  we  have  pointed  out,  the  tax  was 
defective  not  alone  in  theory,  but  also  ii.  administration.  It 
started  out,  just  as  did  the  income  ta.xes  in  England  and 
Germany,  with  inadequate  administrative  machinery,  and  it 
did  not  last  long  enough  for  the  progressive  improvement 
of  administrative  methods  to  disclose  itself.  What  was  the 
work  of  many  decades  in  other  countries  could  not  reasonably 
be  expected  to  be  accomplished  in  a  few  years  in  the  United 
States.  Moreover,  the  difficulties  of  administration  were 
enhanced  not  only  by  the  proverbial  weakness  of  American 
administrative  methods  in  general,  but  also,  and  especially 

•  BouUvoll,  ,'/,  ,  ;V.,  p.  259. 


48o 


The  Income  Tax 


after  the  termination  of  the  war,  by  the  hostile  public  senti- 
ment. This  hostility,  as  we  have  learned,  is  always  to  be 
observed  at  the  outset  of  any  system  of  income  tax.  In  Eng- 
land and  Prussia  it  was  many  decades  before  the  opposition 
diminished,  while  in  the  United  States  the  tax  was  abolished 
before  there  was  any  real  abatement  in  the  feeling  of  repug- 
nance to  the  tax.  In  the  face  of  a  hostile  public  sentiment, 
even  the  best  administrative  methods  are  powerless ;  and 
when  we  have,  as  in  the  United  States  during  the  period  o* 
the  Civil  War,  a  combination  of  poor  administration  and  of 
popular  prejudice,  the  result,  so  far  as  concerns  the  funda- 
mental requisite  of  equality  of  taxation,  was  bound  to  be  a 
comparative  failure. 


! 


In< 
Im 
Im 

Im 

Im 
In< 
In< 
Im 
Im 
Im 
Im 

Im 

Im 

Im 

Im 

Im 


Sp 


^1 


1= 


TADL 
Proceeds  of  uie  Civii 


Income  from  |6oo  to  $10,000    .     . 

Income  over  $10,000 

Income  from  property  of  citizens 

residing  abroad 

Income    from    interest    on    U.  S. 

securities 

Income  from  $600  to  $5000 .     .     . 

Income  over  $5000 

Income  over  $1000 

Income  over  $2000 

Income  from  banic  dividends  .  . 
Income  from  bank  profits  .  .  . 
Income    from     canal    companies' 

dividends 

Income  from  insurance  companies' 

dividends 

Income   from  railroad  companies' 

dividends 

Income  from  railroad  companies' 

interest  on  bonds  .... 
Income  from  turnpike  companies' 

dividends 

Income    from    salaries    of    L. S. 

officers  and  employees      .     . 


I8«;i 

$    172.770.35 
277.461.65 

1.872.11 


ltM4 

$   7.944,153.51 
6,855,160.37 

58,674.51 

75-373-93 


766,605.85   I      1,577,010.73 


Total 
Special  income  tax 


I  4.210.40 

! 

225,485.44 

i 

I       3.38.533-49 

i 

I        253-998-72 

1,101.38 

696,181.71 
$2,741,858.25 


92,120.69 

i 

445.366.17 

927.39338 
596,859.09 

>  7494-73 

1,705.124.63 
$20,294,731.74 


Grand  Total 


$2,741,858.25     $20,294,731.74 


$  9,6g7.24'i.(/i 
9.362.33(1.46 

1 69.924. 17 

133.402  76 
539.i43-::» 
801.941.99 


ituia 


1867 


3,991.211 

25.511 

386.223 

768.770 

2,47 '.9 1 4 

847,683 

28.212 

2,826,491 

$32,050,017 
28,929.312 

$60,979,329 


$26,046,759.76  $31,492,694.16 
34.501.12267^  25,547,946.51 

$32,027,610.78  $25 

4.193.070.61  I   3,278.322.56 1   2.914.841.41}   3 


47-592-59 

496.652.76 

i 

709,933.58 

203.233.77 

I95.38:.I9 

215.279.96 

783,882.05 

563473-93 

605489-78 

2.:o5.852.45 

3,379,262.19 

2,630,!74.o8 

2 

1.255.916.98 

1,259,155.80 

, 

^7.33346 

30,703.06 

49,55' -57 

3.717.394.69 

1,029,991.98 

1,043,561.40 

$72,982,159.03 

$66,014,429.34 

»4M5S,S98-36 

»34 

452,550.00 

$7343-;-709.03 

$66,014,429.34 

»4i455.S98-36 

$3A 

*  From  the  AttMual  RtftH  efthi  Commissi 


TABLE  I  • 
iJiE  Civil  War  Income  Tax* 




ISflB 

is;o 

1S71 

1«7« 

1*73 

1874 

187S 

i8-e 

1877 

Total 

~~~~~ 

$  17.814,170.82 

'                       1 

! 

16494,961.48 

1 

230470.79 

212413.84 

' 



58,078,597.20 

$25,025,068.86 



60,851,011.17 

$27,115,046.11 

$10,680,966.69 
3,753.982.70 
1,542,667.75 

94,848,692.44 

3.78 

$  8416,685.87 
2,162,564.31 

$3,927,252.76 
85,271.76 

16,097.921.33 



3,769.185.69 

3,573.272.45 



27,854,024.01 
1,279,690.42 

1 .41 

3.58 

230.602.81 

847,668.33 

2,831,140.03 

1,503,846.51 

22,381.09 

561,962.52 

■ 
251.048.75 

926.519.00 

2,898,802.31 

1,869,369.34 

32,289.24 

1,109,526.4:: 

47,042.89 
243.205.21 

i,i3M39-59 
974,345-35 

11,738.02 

i 

787,2^.55 

1 

136.052.35 

270,531.14 

1,851,296.30 

1,291,026.68 

14,140.48 

294,564.65 

24.615.17 

8,678.17 

760,930.35 

135.642.55 
2.379.67 

117,541-72 

1,785,812.11 
5,689,070.15 

21416,738-53 

9,987,844.63 

237.324.76 

14,029,99488 

9.96 

9.78 



1 

i 
i 

4.08 

S.80 

J-57 
1.40 

$139472.09 

! 
$232.64    !f5«S-27 

$97-79 

«.36 

>34,79>.8SS-84 

>37>775,873-6:! 

$19,162,650.75 

$14436,861.78 

$5,062,311.62 

$139,472.09 

$232.64 

$5.SS.27 

$97-79 

$346,908,738.56 
29,381,862  no 

•8.36 

>34,79i.855.84 

$37,775,873-6:: 

i  $19,162,650.75 

$14436,861.78 

$5,062,311.62 

$139472.09 

$232.64 

I588.27 

$97-79 

$376,290,600.56 

e  Cemmiitiontr  a/Imtrrnal  Rntnnrfor  the  y/ar  tijj. 


'i^r.^L.'K'r. 


m. 


The  Civil  War  Income   Tax 


481 


\% 


TABLK   II 

Number  of  Persons  Asskssk,.  .0  the  Civil  War  Ixcomf 
Tax  bv  Classes' 


Amount  or  !  ConKESHnNuiNO 
Tax         I    T(»  Incomk  of 


1H67  1H«8 


IWiO 


'«70         1871     I     i^^.j 


'"::!::!'  ^i-rii-  — ^i-.55b  >o;^T.,a;; 


a,ooo-2,8oo 


1.400-2.000  '    68,680  I     55,9^9  I     6g,,s^  I     68  g^ 


ao  or  less 

ao-50 

ao-so 

50-100 

SO- 100 

100-500  !      3,000-11.000  '    46,055 
100-250  i      6,000-12,000  i 
250-500  ^     12,000-22,000  , 
Over  500         Over   n.oco  '       9,282 
Over  500  !      Over  aa.ooo 

I  T<.tal 


I    25.479  '    22,619 


2,800-4,000  I 

2,000-3,C00  40,899!      38,9571       41,196 

4.000-6,000  '  ' 

51.188  i    45.002 


'  ly.795  '   18.887 
40.839 , 

,  ",<.I7  13,335 
44.73a ; 

j  l°.7-t2  11.355 

I  3.707  4.264 

9.316  2,135  2,489 


.965  i       9.464 

i 

366.135  '   254.617     272,843  !i;6,66i      74  777  ,    73,949 


.JX 'p'vl'""""  "'''"  "^  '"  '"'""''"'""'  '^  '"'-""'  '—f-  "" 


2! 


APPENDIX 


The  Income  Tax  in  the  Confederacy 


I  ; 


The  history  of  the  Civil  War  period  would  not  be  complete 
without  culling  attention  to  the  fiscal  experiments  made  by 
the  Confederate  {government.  The  Confederacy  was  fortunate 
in  having  at  the  head  of  its  finances  in  C.  G.  Memminger  a 
secretary  of  the  treasury  whose  fitness  for  the  position  was 
far  greater  than  that  of  the  statesman  who  filled  a  similar 
position  in  the  North.  In  fact,  had  the  fortunes  of  the  war 
been  determined  by  the  comparative  ability  of  the  statesmen 
and  the  generals  rather  than  by  sheer  economic  superiority, 
there  is  not  much  .ioubt  but  that  the  South  would  have  been 
the  victor.  Notwithstanding  the  great  ability  of  Memminger's 
reports,  howjver,'  the  peculiar  situation  of  the  South  made  a 
resort  to  taxation  exceedingly  difficult,  and  the  fortunes  of  the 
war  soon  undermined  the  economic  basis  of  the  fiscal  policy. 

The  Confederacy,  like  the  Union,  started  out  with  a  direct 
tax.  On  July  24,  1861,  Secretary  Memminger  sent  a  n- 
munication  to  the  provisional  Congress,  urging  that  twenty- 
five  millions  be  raised  by  ta.xing  real  estate,  slaves,  and  all 
personal  property.  Congress  followed  his  recommendation, 
and  by  the  act  of  August  19,  1861,  imposed  the  so-called  war 
tax  of  one-half  of  one  per  cent  on  all  property.  The  Confed- 
erate constitution  contained  a  provision  as  to  direct  ta.xes 
analogous  to  that  found  in  the  constitution  of  the  United 
States ;  but  as  the  war  precluded  the  taking  of  any  census, 
the  president  ruled  that  the  provision  as  to  apportionment 
of  the  tax  might  be  dispensed  with.  The  collection  of  the 
tax  was  therefore  left  to  the  individual  states,  with  a  conse- 
quence that  only  an  insignificant  amount  was  collected,  and 

'  AH  of  the  linnncial  ri'iMirts  of  Mcminin";fr  are  printed  in  the  appendix  to 
Henry  1).  Taper.  Th^  life  jii,l  Timfs  of  C.  (1.  Menimingf):  Richmond,  1893. 
This  volume  will  hereafter  be  referred  to  as  Memminger. 

4S2 


H 
1/5 

X 

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fi               -  g 

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—  r^   '  6    '  r^    "  '1  fi n 

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u     .     .     ,  ....  

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I 


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T/te  Income  Tax  in  the  Confederacy         483 

even  then  most  of   the  sums  paid  over  by  the  states  w  .-e 
raised  by  loans.' 

■V.,;-,!  the  Confederate  Congress  assembled  for  its  regular 
i.,SNi<m  in  i'\.'.ri,iry,  1862,  it  was  seen  that  the  aversion  of  the 
;  CI  pic  t''  dirccL  taxation  was  so  great  as  to  have  rendered 
I  Hi    var   tux    pr-cticaily   nugatory.       Secretary   Memminger 
called  Lh.;  a.i.jntion  of  Congress  to  the  matter,  and  urged  the 
necessity  of  enforcing  the  collection  of  the  taxes.     "  The  war 
tax,"  he  tells  us,  "  has  already  put  in  motion  all  the  machinery 
requisite  for  levying  a  tax.     It  has  selected   those  articles 
which  can  best  bear  the  burden,  and  it  levies  on  their  value 
the  very  moderate  rate  of  one-half  of  one  per  ce-it.     The  sim- 
plest of  all  plans,  therefore,  would  be  an  increase  of  this  tax."  '- 
The  secretary  was  forced,  however,  to  rely  principally  upon 
the  sale  of  bonds,  and  was  met  by  the  difficulty  that  there 
was  no  availabl.'  floating  capital  for  investment.     It  was  for 
t;.:s  reason  that  he  suggested  that  payment  for  the  bonds 
might  be  made  in  kind.    "  The  inquiry  naturally  arises  where 
arc  these  lenders  to  be  found  .'     Our  people  have  property  in 
abundance  but  they  have  no  suri)his  capital  in  money.     Our 
plans  must  be  modified  to  meet  this  difficulty.     We  must  ac- 
cept products  in  exchange  for  the  bonds  wherever  they  can  be 
made  available  for  the  wants  of  the  government.     The  farmer 
has  supplies  for  the  army ;  the  manufacturer  has  clothing  or 
other  coiimodities;  the  railroad  company  has  transportation; 
the  miner  has  coal  and  iron;   all  of  which  the  government 
needs.     If   these   supplies  can  be  obtained  in  exchange  for 
Confederate  bonds,  a  loan  in  kind  is  effected  on  credit,  to  the 
satisfaction  of  both  parties."     Thus  was  inaugurated  the  .so- 
called  produce  loan,  which  paved  the  way  for  the  later  income 
tax  in  kind. 

The  experience  of  the  Confederacy  with  loans  was  not 
more  successful  than  that  with  the  dinxt  tax,  and   accord- 

'  Cf.  I.e.  Schwab,  The  Co>tfe,ler,itr  S(.,/es  c/  .■hiifri,,,,  /S6/-/S/-,-,  „  /-imimial 
ami  InJmtrial  History  of  (hf  South  during  the  Ciril  IVar.  New  York,  1901, 
p.  2.S5. 


'  Me'ri>-i:»;:tr,  cT. 


V-  4jD. 


s^^.'P 


484 


The  Income   Tax 


I 


i 


iiigly,  on  January  10,  1863,  Mcmminger  determined  to  make 
an  effort  to  induce  Congress  to  taite  up  the  matter  of  taxa- 
tion more  energetically.  In  his  report  of  that  date  he  dis- 
cussed the  choice  to  be  made  between  various  kinds  of  taxes, 
and  declared  his  preference  for  taxes  on  projjcrty  and  income. 
"  It  seems  to  me  that  a  tax  upon  property  and  income  is  so 
much  to  be  preferred  to  stamp  duties,  excises,  licenses  and 
other  like  taxes,  which  call  for  a  machinery  vexatious  in  its 
character  and  expensive  in  its  operation,  that  there  will  be 
little  hesitation  on  the  part  of  Congress  in  its  acceptance. 
The  direct  tax  heretofore  levied  has  set  in  operation  all  the 
machinery  necessary  to  levy  another;  and  an  income  tax 
could  be  collected  by  the  same  means.  It  seems  to  me  that 
both  these  forms  of  tax  should  be  adopted.  To  lay  a  suf- 
ficient tax  upon  property  alone  would  require  too  large  an 
increase  in  the  rate.  Such  an  increase  would  operate  with 
peculiar  hardship  upon  property  producing  no  income.  On 
the  other  hand,  a  tax  upon  income  is  so  easily  evaded,  that  of 
itself  it  would  furnish  an  insecure  resource.  It  is  proper, 
however,  that  income  should  be  taxed;  otherwise  the  whole 
profits  of  speculation  and  trade,  together  with  those  resulting 
from  skill  and  labor,  would  escape  contribution.  I  proi)ose, 
therefore,  that  a  tax  be  imposed  upon  property,  and  upon  the 
gross  amount  of  incomes  of  every  kind,  excepting  those  below 
some  minimum  to  be  adjusted  by  Congress."  ' 

The  secretary  estimated  the  yield  of  a  tax  of  one  per  cent 
on  property  at  about  thirty-six  millions,  and  he  thereupon 
proceeded  to  discuss  the  probable  returns  of  an  income  tax. 
"  It  may  be  assumed  that  the  net  income  of  property  is  mea.s- 
ured  by  the  average  rate  of  legal  interest  of  the  money  which 
rei)resents  its  value.  If  the  tax  were  laid  ujx^n  net  income, 
and  that  income  were  faithfully  returned,  it  could  in  this  way 
be  estimated  with  some  degree  of  accuracy.  But  the  de-ices 
are  so  many  by  which  a  return  of  net  income  can  be  evaded, 
as  to  make  such  returns  unreliable.  A  resort  to  gross  income 
is,  therefore,  more  expedient.     The   difference  between  the 

'  Memmtn^tr,  op.  (it.,  p.  448. 


-itv 


The  Income   Tax  in  the  Confederacy         485 

two  must  be  at  least  25  per  cent;  but,  under  existing  circum- 
stances, ;uid  for  the  purpose  of  an  estimate,  it  would  be  pru- 
dent to  disregard  the  difference  and  assume  that  the  returns 
of  gross  income  will  be  about  equal  to  the  average  rate  of 
legal  interest.  It  is  believed  that  even  the  proceeds  of  skill, 
speculation  and  labor  which  may  be  returned  where  no  capi- 
tal is  involved,  will  not  materially  vary  the  result."  Calcu- 
lating the  total  income  st  about  280  millions,  he  figured  that 
a  ten  per  cent  income  tax  v/ould  yield  28  millions.'  Revert- 
ing, however,  to  the  idea  which  underlay  the  produce  loan,  he 
now  recommended  that  the  incon.j  tax  should  be  payable  not 
only  in  money,  but  ai.so  in  kind. 

Congress  adopted  these  suggestions  with  some  modifica- 
tions, and  a  few  months  latei  enacted  a  comprehensive  tax 
measure.'^ 

The  law  of  1863  imposed  a  direct  tax  of  eight  per  cent  on 
naval  stores  and  agricultural  products,  as  well  as  a  tax  of  one 
per  cent  on  securities  and  capital  invested  in  a  busines.s  which 
was  not  taxed.  In  the  second  jjlace  the  law  provided  for  a 
series  of  license  taxes  on  trade,  business,  and  occupation,  some 
of  them  specific  taxes,  some  calculated  according  to  gross  re- 
ceipts. Then  came  a  series  of  provisions  affecting  incomes. 
A  separate  section  imposed  a  tax  upon  "the  salaries  of  aU  sal- 
aried persons  serving  in  any  capacity  whatever,  except  upon 
the  salaries  of  all  persons  in  the  military  or  naval  service." 
The  tax  was  to  be  at  the  rate  of  one  per  cent  on  salaries  not 
exceeding  Si 500 and  two  per  cent  above  that  amount;  but  re- 
cipients of  salaries  of  less  than  Siooo  were  exempt.'^  The 
salaries  tax  was  followed  by  the  so-called  income  tax  proper. 
It  was  imposed  on  "income  and  profits  derived  b\'  each  person, 
joint-stock  company  and  corjxiration,  from  every  occupation, 
employment  or  business,  and  from  every  investment  or  labor, 

•  Mtmminger,  op.  al.,  pp.  449,  450. 

"  Alt  of  April  24,  1S63,  c.  xxxviii,  Pu/'l-'-  /ow!  of  the  ConfeJerute  States  of 
Am,ru,u  f.iae.l  ,it  the  ThiiJ  Session  cf  the  first  Congres,,  /SOj.  Kditc.l  by 
J.iimw  M.  Mattlious.     Riclimond,  lS6j,  pp.   115  et  sc;i 

■'  >cc.  7. 


486 


The  Income  Tax 


skill,  property  or  money,  and  the  incon.     .md  jirofits  derived 
from  any  source  whatever  except  salaries."     The  allowable 
deductions  for  expenses,  repairs,  etc.,  were  carefully  elabo- 
rated in  a  series  of   six   provisions.     In   incomes  from  real 
estate,  other  than  houses,  a  deduction  not  exceeding  ten  per 
cent  of  the  gross  rent  was  permitted  for  necesf^ary  annual 
repairs ;  in  the  case  of  houses  the  deduction  was  limited  to 
five  per  cent.     In  incomes  from  manufacturing  and  mining 
business,  a  deduction  from  "the  gross  value  of  the  products 
of  the  year"  was  permittee',  for  rent  as  well  as  for  cost  of  labor 
and  of   raw  materials.     In  incomes  from  navigating  enter- 
prises, deductions  from  "gross  earnings,  including  the  value 
of  freights  on  goods  shipped  by  the  person  running  the  ves- 
sel," were  allowed  to  the  extent  of  "the  hire  of  the  boat,  if 
not  owned  by  the  person  running  the  same,  or  if  owned  by 
him,  a  reasonable  allowance  for  the  wear  and  tear  of  same, 
nut  exceeding  ten  per  cent  per  annum,  and  also  the  cost  of 
running  the  boat  or  vessel."     If   the  income  were   derived 
from  boat-  or  ship-building,  deductions  might  be  made  "  from 
the  gross  receipts  of  the  occupation,  including  the  value  of 
the  ship  when  finished,"  to  the  extent  of  the  cost  of  labor  and 
"the  prime  cost  of  materials."     If  the  income  were  derived 
from  the  sale  of  property,  there  might  be  deducted  from  the 
gross  sales  "  the  prime  cost  of  the  property  sold,  including 
the  cost  of  transportation,"  as  well  as  the  salaries  of  clerks 
and  the  rent  of  buildings.     Deductions  similar  to  the  last 
were  allowed  for  other  incomes  and  in  the  case  of  mutual 
insurance  companies  a  further  deduction  was  permitted  for 
the  amount  of  losses  paid  during  the  year. 

The  rate  of  the  tax  was  progressive,  the  scale  being  con- 
siderably higher  than  in  the  Union.  Incomes  below  §500 
were  exempt;  from  $500  to  Si  500  the  rate  was  5  ^r  ;  on 
incomes  between  $1500  and  S3000  5%  was  levied  on  the 
first  Si 500,  and  10%  on  the  remainder;  incomes  between 
S3000  and  S5000  paid  10  %  ;  incomes  between  S5000  and 
510,000  paid  \2\<'/(  ;  and  incomes  of  $10,000  and  over  paid 
15  %• 


ll^Mi^^^^Sm^k.:^jMi^^S^:M^^>jmi^- 


The  Income   Tax  in  the  Confederacy         487 

In  addition  to  the  personal  income  tax,  all  joint  stock  com- 
panies and  corporations  were  required  to  "reserve  one-tentli 
of  the  annual  earninf^s,  set  apart  for  dividends  and  reserve 
fund."  Where  this,  however,  amounted  to  more  than  10% 
and  less  than  20%  upon  the  capital  stock  paid  in.  the  rate  of 
tax  was  \2\  %;  and  where  the  profits  were  more  than  20% 
the  rate  was  i6;i  %.  It  w.  s  provided,  however,  ..,at  the 
dividends  so  paid  to  the  stockholder  should  not  be  consid- 
ered a  part  of  his  income. 

Kvcry  person  was  required  to  make  a  return  of  his  income, 
and  if  the  assessor  was  dissatisfied,  he  was  to  select  "one 
disinterested  citizen  in  the  vicinage  as  a  referee,"  the  taxpayer 
to  select  another,  and  these  two  to  call  in  a  third.  The  find- 
ings of  a  majority  of  these  referees  were  to  be  conclusive. 

In  addition  to  the  income  tax  proper,  which  was  payable 
in  cash,  the  law  provided  for  a  tax  in  kind.     This  was  a  tax 
of  ten  per  cent  on   all  profits  made  by  the  purchaser  within 
the  Confederate  states,  or  by  sale  of  any  flour,  corn,  bacon, 
pork,  oats,  hay,  rice,  salt,  iron,  or  the  manufacture  of  iron,' 
sugar,  molasses  (molasses  of  cane),  leather,  woollen  clothsi 
shoes,  boots,  blankets,  and  cotton  cloths.     The  tax,  however,' 
vas  not  to  apply  to  the  purchases  and  sales  "  made  in  the 
due  course  of  the  regular  retail  business."     Furthermore,  the 
profits  reached  by  the  tax  in  kind  were  not  to  be  included 
in  the  income  subject  to  the  regular  income  tax.     A  series 
of   interesting  adn.inistrative  provisions  was  added.     Every 
farmer  and  planter,  after   reserving   lor    his    own    use    fifty 
bushels  of  potatoes,  one  hundred  bushels  of  corn,  fifty  bush- 
els of  wheat,  and  twenty  bushels  of  peas  or  beans,  was  re- 
quired to  deliver  to  the  government  for  its  use  one-tenth  of 
all  his  crops,  as  soon  as  the  crops  were  ready  for  market. 
In  case  of  disagreement  between  the  taxpayer  and  the  asses- 
sor, three  referees  were  to  be  selected,  as  in  the  case  of  the 
cash  income  tax,  and  these  were  to  estimate  "the  quantity, 
the  quality,  and   the  value  of   the    produce."     The  planter 
was  required  to  deliver  the  articles  so  estimated  within  two 
months  from  the  time  of  estimate,  at  a  denot  not  m.'^.re  than 


.^^/•^:S^:i;i;^A^!!i.M^mM;^^ 


488 


TAe  Income  Tax 


eight  miles  from  the  place  of  production,  in  default  of  which 
he  was  to  suffer  a  penalty  of  fifty  per  cent.  The  government 
was  to  furnish  sacks  and  to  allow  the  cost  of  barrels.'  Every 
farmer,  planter,  and  grazier,  moreover,  was  required  to  exhibit 
to  the  assessor  an  account  of  all  the  hogs  he  might  have 
slaughtered,  and  to  "deliver  an  equivalent  of  one-half  of 
the  same  in  cured  bacon,  at  the  rate  of  si.xty  pounds  of  bacon 
to  a  hundred  weight  of  pork."  In  the  case  of  cattle,  horses, 
and  mules  not  used  in  cultivation,  the  tax  was  one  per  cent 
upon  the  value ;  but  if  any  beeves  had  been  sold,  the  gross 
proceeds  of  such  sales  "  shall  be  estimated  and  taxed  as  in- 
come, after  deducting  therefrom  the  money  actually  paid  for 
the  purchase  of  such  beeves,  if  they  have  been  actually  pur- 
chased, and  the  value  of  the  corn  consumed  by  them."^ 

In  May,  1863,  Secretary  Mcmminger  issued  detailed  in- 
structions for  the  collection  of  the  tax.  He  called  particular 
attention  to  the  fact  that  if  any  person  should  refuse  or  neg- 
lect to  give  lists  or  make  returns,  the  assessor  might  "  enter 
upon  his  premises  and  upon  -iew,  or  from  state  tax  lists,  or 
any  other  record  or  documents,  or  by  any  other  lawful  ways 
or  means,  shall  make  a  list"  himself,  after  adding  twenty-five 
per  cent.''  He  also  directed  that  if  any  commission  merchant 
held  in  store  on  account  of  any  one  else  any  agricultural 
products,  the  former  was  to  pay  the  tax.  The  taxes  in  kind, 
moreover,  were  all  to  be  transferred  to  the  duly  authorized 
post  quartermaster;  that  is,  they  should  be  subject  to  the 
military  department.  But  whenever  articles  collected  by  the 
post  quartermaster  consisted  of  cotton,  wool,  or  tobacco,  they 
should  be  subject  to  the  order  of  the  district  collector ;  that 
is,  to  the  treasury  department.* 

Such  were  the  provisions  of  the  income  tax  law  passed  by 
the  Confederacy.  It  soon  gave  rise  to  much  discontent  for 
the  reason  that  the  income  .ax  proper  was  payable  in  Confed- 

iSec.  II.  '■'•■'<;';•  '2. 

'  htstrui'tiotis  for  T,  "'rtors  of  "^.rrrs.      Tiemiiry  Dep.irlment.     ConfeMratc 
Statts  of  Amnicii.     Riclimond,  May  15,  1S63,  p.  7. 
■  Op.  III.,  \'.  14. 


/^Si£iU^. 


The  Income   Tax  in  the  Confederacy  '      4S9 

erate  money,  which  had  now  bej^iin  seriously  to  depreciate, 
while  the  farmers,  subject  to  the  tax  in  kind,  could  not  avail 
themselves  of  this  advantage.  Numerous  meetings  of  protest 
accordingly  were  held  in  various  places,  especinily  in  North 
Carolina.  Some  of  the  resolutions  passed  at  these  meetings 
were  as  follows : '  "  The  act  of  Congress,  in  secret  session, 
without  consulting  with  their  constituents  at  home,  taking 
from  the  hard  laborers  of  the  Confederacy  one-tenth  of  tl.v, 
people's  living,  in.stead  of  taking  back  their  own  currency  in 
tax,  is  unjust  and  tyrannical,  and  we  solemnly  protest  against 
that  act."  At  another  meeting  it  was  resolved  "  that  we 
pledge  ourselves  to  each  other  to  resist,  to  the  bitter  end,  any 
such  monarchical  tax,  —  any  such  contempt  to  our  state  —  to 
pay  such  a  tax  to  a  Virginia  tithing  man."  In  another  place 
the  tax  was  criticised  as  "unjust,  tyrannical,  and  oppressive, 
and  a  relic  of  barbarism  which  alone  is  practised  in  the  worst 
despotisms."  Most  of  the  resolutions  contained  a  statement 
that  "we  are  in  favor  of  a  just  and  equitable  system  of  taxa- 
tion, so  that  all  classes  may  bear  their  burdens  equally  ;  wc 
are,  therefore,  opposed  to  the  tithing  system  .  .  .  discrimi- 
nating against  and  taxing  the  labor  and  industry  of  the  agri- 
cultural classes." 

It  was  largely  owing  to  this  discontent,  as  well  as  to  the 
need  of  increased  revenues,  that  the  commissioner  of  taxes, 
in  his  report  of  November,  1863,  suggested  a  decided  increase 
in  the  income  tax.  If  necessary  a  tax  of  twenty-five  per 
cent  should  be  laid  on  incomes  over  $5000,  and  fifty  per  cent 
on  all  over  S  10,000,  and  fifty  per  cent  on  the  profits  of  all 
joint  stock  companies  and  corporations,  over  and  above  a 
dividend  of  twenty  five  per  cent  paid  to  their  stockholders. 
This  may  be  considered  exorbitant,  and  capitalists  may  think 
it  oppressive,  but  it  is  neither.  Every  man  should  be  satisfied 
with  a  support  for  himself  and  family,  and  all  he  makes 
above  that  should  be  divided  with  his  country.  No  man 
should  desire  to  amass  a  fortune,  or  to  increase  his  fortune, 
if  he  already  has  '  ;ie,  from  the  hard  necessities  of  a  bleeding 

'  THlsc  (lui)tatiiins  will  In;  fuuml  in  Schwab,  of.  at.,  p|..  295-29(3. 


490 


The  Income  Tax 


country.  While  three-fourths,  perhaps,  of  the  men  of  the 
Confederacy  have  dedicated  their  lives  or  fortunes,  and  in 
many  instances,  both,  to  their  country's  cause,  the  i  nnaining 
fraction  have  no  moral  ri.i;ht  to  amass  fortunes  at  their  ex- 
pense." '  Secretary  Memminger,  in  his  report,  called  atten- 
tion to  the  report  of  the  commissioner  and  adverted  to  the 
necessity  of  more  revenue.''^  He  pointed  out  that  the  direct 
tax  of  1861  h.ad  been  collected  in  only  three  states,  but  that 
the  new  tax  of  1863  "is  now  being  rapidly  collected.  From 
present  appearances  the  commissioner  estimates  its  probable 
collections  at  ^100,000,000  in  money,  and  he  reports  that  it  is 
paid  with  general  cheerfulness  and  alacrity."  •'  The  Secretary 
stated,  however,  that  the  novelty  of  many  of  the  provisions 
of  the  law  had  given  rise  to  serious  (piestions. 

The  protests  against  the  income  tax  in  kind  continued, 
and  Congress  now  endeavored  to  meet  some  of  the  objections 
by  slight  modifications.  Thus  on  December  28,  1863,  it  was 
provided  that  the  tax  on  sweet  potatoes  might  be  commuted 
by  payment  in  money,  and  on  January  30,  1864,  a  similar 
provision  was  adopted  in  the  case  of  tobacco.  With  these 
and  other  slight  modifications,  however,  the  tax  was  continued 
by  the  general  tax  law  of  February  17,  1864,*  although  an 
effort  was  made  to  meet  the  wishes  of  the  secretary  of  the 
treasury  and  of  the  commissioner  of  taxes  by  levying  new  taxes 
on  property  and  by  making  a  decided  '-.urease  in  the  income 
tax  proper.  This  tax  was  now  increased  by  ten  per  cent, 
raising  the  maximum  rate  to  twenty-five  per  cent,  and  a 
similarly  augmented  rate  was  applied  to  the  profits  of  all 
joint  stock  companies,  whether  incorporated  or  not,  exceeding 
twenty-five  per  cent. 

'  Report  of  /he  ( 'omwhsiontf  of  Taxes  aceompanyin.;  the  Kefort  of  the  Stcre- 
tary  of  the  Tre.isury.  Richmond,  l86j,  p.  2.  (/  iC-mnan,  Income  Taxation. 
Milwaukee,  1910,  p.  271. 

-  Memminger,  of.  ,;/,  p.  466.  '  <->p.  "V..  p.  473- 

*  An  .iLt  tu  Uvy  .i.lilitiunal  Taxes  for  the  Common  Defence  ami  Support  of  the 
Government.  Chap.  Ixiv.  In  riiMie  I.a-os  of  the  Confederate  States  of  .America 
(•asH.t at  the  fourth  Se.'fion  of  the  Tint  i'oni^ness,  /S6j-iS6^.  tMileil  l)y  James 
.M.  Matthews.     Kicnmunii,  IS04,  p.  ioy. 


The  I)icomc   Tax  in  ///(•  Coiijidtracy  )i;i 

This  was  the  last  of  the  iiuomc  tax  aits  of  tlic  Coiilnl 
eracy.  In  his  report  of  May  2,  1X64,  Seiretary  Meiniiiin';er 
discussed  the  situation.  He  pdiiUnl  out  that  about  tlie  only 
revenue  that  the  government  could  e.\|)cct  duiiu;;  the  coiuinj; 
year  was  from  the  tax  in  kind.  "The  iiKmtin^^  intcivst, 
whenever  it  is  beyond  the  reach  of  the  enemy,  is  pioNperous 
and  can  contribute  to  the  public  wants  as  largely  as  any 
other."  But  he  stated  that  under  the  administration  of  the  tax 
"the  prosperous  are  favored  with  a  discoiuit,  while  the  unfor- 
tunate whose  farms  have  been  ilesolated,  are  re(|uircil  to  pay 
upon  the  value  of  their  capital,  without  any  relief  froui 
crops."  '  The  secretary  also  called  attention  to  the  (li.^crinii 
nation  arisini;  from  the  fact  that  whereas  the  tax  in  kind 
assessed  on  farmers  was  deducted  from  the  five  per  cent  tax 
on  capital,  the  same  treatment  was  not  accorded  to  the 
owners  of  non-a<,'ricultural  property.  He  asked,  therefore, 
for  a  reconsideration  of  this  part  of  the  tax  act.'*  In  aniUlier 
respect,  also,  as  he  pointed  out,  a  discrimination  was  ob.serv- 
able,  but  in  the  reverse  sense.  Non  a;^ricultural  property 
was  assessed  at  its  value  in  dejjreciated  currency,  while  agri- 
cultural property  was  assessed  at  the  values  existing  at  the 
outbreak  of  the  war,  before  depreciation  had  .set  in.  "  I'his 
inequality  creates  discontent  in  the  jMihlic  mind  and  cannot 
be  maintained  as  just?  and  equal.  In  ail  public,  as  well  as 
T'ivate  transactions,  it  is  dangerous  to  deiKirt  fnjm  the  great 
piinciples  of  justice,  with  a  view  to  effect  present  expedieiu  v. 
Doubtless  it  was  siq)pose<i  that  legislation  of  this  kind  would 
reach  the  speculator  and  extortioner.  IJut  it  will  be  found 
that  most  of  these  classes  have  escaped  the  tax  by  taking 
refuge  in  agricultural  investments  ;  while  thousands  of 
widows  and  ori^hans  and  Io\al  citizens,  who  have  invested 
their  all  in  stocks  and  securities,  are  deprived  ot  their  means 
of  support. "■■'  Finally,  the  secretary  called  attention  to  the 
workings  of  the  property  and  income  tax,  including  the  tux 
in  kind,  and  stated  that  over  eighty-two  millions  had  been 
received  from  the  internal  taxes.     He  declared,  however,  tliat 

■  .;/V;/,.j..<;^-c/,  ../...,'.,  j..  454.  /.-.u.,  ,..  4.^5.  -  y.  .u.,  ^i.  4S;, 


492 


The  Income   Tax 


"  the  difficulties  which  are  cncoiinterctl  in  the  collection  can 
only  bo  estimat«.'d  by  any  one  who  will  inspect  the  mass  of 
papers  which  are  required  for  each  return,  and  the  inquiries 
necessary  to  be  made  of  each  indiviilual  taxpayer.  The  re- 
sults of  the  tax  will  probably  confirm  the  recommendation 
already  made  of  a  ^  isort  to  a  more  simple  system  of  taxation. 
The  frauds  and  evasions,  which  cannot  be  discovered  under  the 
present  system,  are  a  perpetual  drain  upon  the  tax,  which  is 
necessarily  increased  by  tlie  number  of  officers  who  must  be 
employed  in  its  collection.  And  after  all  is  done  liy  the 
government  which  is  possible,  the  result  is  that  the  most 
cunning;  in  devices  will  escape,  whilst  only  the  honest  and 
conscientious  pay  the  full  and  just  demands  of  the  law."  * 

The  recommendations  of  Secretary  Memminf,'er,  however, 
could  not  be  put  into  force.  The  Confederacy  was  hastening' 
to  its  close,  and  amid  the  universal  confusion  incident  to  tne 
breakinji  up  of  the  body  politic,  but  little  p.ttention  could  be 
paid  to  revenue  questions.  The  experiment  of  the  Confed- 
eracy with  the  income  tax  thus  forms  an  unfinished  chap- 
ter in  fiscal  history.  In  many  respects  the  provisions  were 
unique,  and  in  some  points  the  laws  were  more  carefully 
elaborated  than  the  similar  legislation  of  the  North.  But 
what  mi^ht  have  happened  with  the  Confederate  income  tax 
under  more  favorable  auspices  is  a  useless  speculation. 

'  Memmiiiger,  of.  <//.,  p.  4S7. 


CllAI'll'.K    IV 

TlIK    l.\(  OMI,     1 W    (II      |X(j,} 

§  I.     Tlic  Oiii^nii  oj  (//,■    lux 

For  almost  two  decules  after  the  ahi'   Inminiit  ot   the  in 
come   tax    the    siil)JL'rt    disai/peaied    Ik.l,   the    piiMi.     mijid.' 
The   demand   tor  a  prot^ressivc  inroiiu;  tax  \v:is  ituK-'d  l.^und 
in    the    planks   of   the   Socialist    party    and    ol    the    laiuiri-, 
L^roujjs  which  afterwards  (onsolidated  into  the  I'opiiiist  p.iii\ 
Hut  in  the  country  at  lar-e  ihc^e  dcinands  were  not  iioti'  (d. 
The  prosi)erity  of  the  eighties  hroii;',lit  to  the  front  ilnpiwlj 
lems  of  surplus  financiering^,  and  the   country  as  a  v, holr  ap 
proved   of  the  protectionist   ])nli(  y  of  thi'   dominant    jMrtv,    a 
corollary  of  which  was  the   j)eriodiiaI  cuttin;^   down  lA  the  in 
ternal   revenue  taxes.     There  was  therefore-   no   need    ol   an\ 
additional   federal  revenue. 

Durin;;  the  bc;(innin;^  of  the    nineties,  however,   tin;   sii'.ia- 
tif)n  chan.i;cd.     The  '^x^:aX  de<  lim.'  in   j^ri'  es  whic  h  had  te-t    in 

'  Thr    greater    part      f  tlii'-   i  )i.i|.I' r    »a^    ]  j'  li^lji  ■!    i',    'lit    /..',•/;,,.■/    \i,>i,, 
('Mr;//f ;-/)',    \.il,   i\       |S,)    ,  I  ji,  ',|  V  f.'     r  ,•      yn  '  ;■,  .1  >'  ,;1,;'.    ■'•<,■■,, i'    |    mi       i;     'i.t 


A'ri.'ni   l.,vn"inc   /■  ri'ii  :!,   vn).  iv      !' 


;,;,,     I.',-    ,1    ■,.,.       I  ,,r    M'l,,  r  '• 

In   '  111'     I  a>.  ■  1,1.1  niii  I.  /■  u> 


porarv  artn  i'-s,  -iet-  ('.  h.  1  >unbjr,  "1  li' 
I-.iOHi'miti,  v..'l.   i.\    I  I  >  ,j    ,  ]■]■.  j'j  f/   ji'/..    A.'  .    %!.  Ili,  "  Nu!.'  Mu;    J    n*i.   i  -  .  iii! 
the    In.'^rm-   r,i\,''  /.  .'c-'; // <■'    /',  .'::i  ,:'  J  :   >iui>i,.\'    '.  i      i'.\,-    ,\\     2'~~'l    /, 
I     ' '.  II, AM-,  ••  l.ivral  l\i'.t-nui  .-.  li:i  '■  !:  •    Ir,   -  ,rr     l,i>,"  .,'/.;/,■,       /    ,'/!  ^  .i'<',v<    ■  .v( 
. fic, /(■///!■,  \..l,  iv  (i,S<q    ,  pji.  !;;7  fY    (■/.       i  in;    'ii-    .i--;  .i  -  ^i.  '     uy-—d'i   •M,i'i,.i 
l>y  G.  Tunnel!,  "  1.1  ;TJslative  Ilistr-ry  (f  thi-   s, .    .,.'    Ii.',.  iii'     lav   i.j.v.    /.un.ui 

i\f  lohllidl  j.^^'HOmv,    \     1.    Ill         l8  '5     ,  pp.     ;ll    rt    .r /.        Iv!    al'.-.e;.    li,,i'.    V»CK    jub- 

l^;^^led  l.t-fure  the  t  iiai  Mienl  "f  !he  law,  bi  e  '.'.It    iii;;  ,ii,er'    ir,  ^  :  i.  .^,' .    i    'n   !'     \, 


N\'t;'.s.  "  riie  111',  tiie'la.\:  K  i'  '".esiru'jl'.  -  "  ;n  the  /  .  /  .c;.  \  ■  '..  1  7  Ib>M  .;'i..lf/ 
iCy'.  .  an  !  tlir  •dr^'unici.t  in  favor  I'V  I'.  ^.  I!a'.:,  "'!!.'  Ir.  rue  !  a.\  :  K'abuus  in 
Its  >av  .r,"    if-iJ..   pp.  14  (•/>.'.     1  ..r  arta  le-   iha'   apptart      af'.er  •!;■   pasnage  of 

the  law,    hut    h-f.|e'';e    dr    l>:on     .f    !l:e  i-i.i!'..  sre     1).     \.    X'le!,.^,     -j-    t:<      l.\i»'..:.^' 

In' "iin  Tax  I'l;  u-'  \va\'  <;.'A  ■"  '.u  •':,•:  /i-r  :,'>;. \"' .  I-  1^.;  i  PP'  =; -7  '■'  '■  an-, 
an  art;<  le  Py   i':,r  i'te-.'ir     '■  ■  oj:."!-    '  ■,■     In   ■■•!,■    lav    '  >,i,,t  ,•  ^i..._,,  ^, ;  ^jn,'  J^.,-  -  ■■ 

I.'/..'.,    »ol.     IS         iSyj      ,    PI'.    4b    (,'   :,-,: 

4Vj 


494 


The  Income   Tax 


R 

ii 

H 

i 

toward  tlie  close  of  the  preceding;  decrulc  was  becoming  more 
.ind  more  m:irkcd.  and  the  prosperity  of  the  western  wheat- 
grower  and  of  the  southern  cotton  planter  was  succeeded  by  a 
period  of  hard  times.  The  immense  growth  of  lar^e  fortunes 
in  the  industrial  antl  financial  centres,  and  the  a|)pearance  of 
the  new  combinations  of  capital  known  as  trusts,  served  to 
set  in  still  greater  relief  the  difficulties  of  the  agricultural 
classes.  This  seeming  conflict  of  interest  was  responsible  for 
several  great  politica'  movements,  each  of  which  reflected 
itself  in  legislation.  In  the  first  pla-e,  the  growing  suspicion 
of  the  aggregations  of  capital  engendered  a  movement  which 
resulted  not  only  in  the  jirohibition  of  railway  pooling  in 
the  inter.state  commerce  law  of  1S87,  but  more  especially  in 
the  Sherman  anti-trust  act  of  i8(^.  In  the  second  place,  the 
fact  that  the  farmers  ascribed  the  falling  prices  of  agricultural 
products  to  the  a])i)reci.ition  of  gold  led  to  the  free  silver 
movement  which  came  within  an  ace  of  entirely  controlling 
the  government's  policy.  In  the  third  place,  the  bad  times 
among  the  farmers  produced  a  gradual  change  in  their  attitude 
to  the  tariff.  Th  protectionists  of  the  Kast  originally  found 
their  allies  among  the  farmers  of  the  West,  not  only  because 
the  favors  of  protection  were  accorded  also  to  the  growers  of 
wool,  but  chiefly  because  of  the  home-market  argument,  ac- 
cording to  which  the  growth  of  industrial  centres  as  fostered 
by  protection  would  afford  an  increasing  demand,  pnd  there- 
fore a  higher  price,  for  the  productions  of  the  soil.  The 
home  market  argument,  however,  slowly  lost  its  force  as  the 
foreign  demand  augmented  and  as  the  country  entered  upon 
the  period  of  immen.se  e.xports  of  agricultural  products.  This 
sapping  of  the  farmer's  interest  in  production  was  now  very 
materially  increased,  during  the  many  weary  years  of  bar! 
times,  by  the  reflection  that  but  for  the  tariff  he  could  secure 
his  clothing  and  his  agricultural  implements  more  cheaply, 
arid  that  it  was  the  jirotected  manufacturers  in  the  I'"ast  who 
were  lending  their  support  to  the  "gold-bu:;s"  of  \V;ill  .Street 
whose  nefarious  machinations,   in  his  ojiiiiion,  were  respon- 

„:ui  -  f^-  4.1,  .  r„ii:„,-  ..^: r  „ — ;  —  u !   i i.„ 

siui^;  lui    lilt;  lauin^  pliu-ji  ui  a^:ii.uiiu: ..:  j,:t,uu'.,i3. 


The  I  Hi     le   Tax  of  i^g^ 


495 


Not  only  were  the  farmers  beKiniiinR  to  become  disloyal  to 
the  policy  of  protection,  but  they  were,  partly  for  the  same 
reasons,  j;rovvin>^  more  favorable  to  the  idea  of  an  income 
tax.  This  tendency  was  accentuated  by  the  changes  that 
were  taking  place  in  state  and  local  taxation.  As  a  result 
of  a  familiar  process,  the  general  property  tax  throughout 
the  country  was  fast  breaking  down.  It  was  becoming,  in 
most  places,  almost  exclusively  a  real  property  tax,  except  in 
the  rural  districts  where  the  tangible,  visible  i)ersoii,ilty  was 
to  be  found.  The  rich  urban  investor  in  securities,  the  wealthy 
business  men,  and  the  well  to-do  professional  classes  were  es- 
caping taxation  almost  entirely.  The  weight  of  state  and  local 
taxation  was  falling  more  and  more  on  the  small  farmer,  who, 
under  existing  conditions  of  international  competition,  was 
unable  to  shift  his  burdens  to  the  community.  The  farmers, 
and  more  especially  the  farmers  of  the  West  and  South,  who 
constituted  the  great  bulk  of  the  middle  classes,  as  well  as  the 
preponderant  factor  in  the  voting  population,  were  becoming 
restless.  In  the  face  of  a  system  of  state  and  local  taxation 
which  rested  with  crushing  force  upon  them,  and  of  a  system 
of  national  taxation  which  no  longer  .seemed  to  afford  them 
any  protection  but  which,  on  the  contrary,  appeared  to  benefit 
the  cla;:ses  responsible,  in  their  estimation,  for  the  fall  in 
prices,  it  was  no  wonder  that  the  complaints  of  the  agricul- 
tural class  should  become  loud  and  deep.  For  s<')me  years  a 
progressive  income  ta.c  was  one  of  the  chief  planks  in  the 
platform,  not  only  of  the  Populists  and  of  the  Anti-monojjo- 
lists,  but  of  the  farmers'  conventions  throughout  the  length 
and  breadth  of  the  land. 

It  was  this  feeling  as  to  the  essential  inetpiality  and  injus- 
tice of  the  tariff,  as  well  as  the  movement  toward  tree  silver, 
which  resulted  in  the  Democratic  victory  of  1S92.  The  ad- 
vent of  President  Cleveland  to  power  w.is,  therefore,  under- 
stood to  mean  a  modification  of  the  tariff,  and  the  urgency  of 
fiscal  reform  was  emj'hasized  by  the  fact  that  the  coimtry  was 
facing  a  series  of  deficits.  Accordingly,  when  the  President 
submitted  his  mcssa<^e  to  Confrress  in   IJecembcr,  180^.  vvc 


ij 


496 


The  Incone  Tax 


find  the  iirst  suggestion  of  an  income  tax,  not,  indeed,  in  the 
shape  of  a  tax  on  incomes  in  general,  but  in  the  form  of  a 
tax  on  incomes  from  corporations.  The  President  said  :  "  I 
am  satisfied  that  the  revised  tariff  duties  provided  for  in  the 
proposed  legislation,  added  to  existing  internal  revenue  taxa- 
tion, will,  in  the  near  future,  though  perhaps  not  immediately, 
produce  sufficient  revenue  to  meet  the  indebtedness  of  the 
government.  The  Committee,  after  full  consideration,  and  to 
provide  against  the  temporary  deficiency  which  may  exist  be- 
fore the  business  of  the  country  adjusts  itself  to  the  new  tariff 
schedules,  have  wisely  embraced  in  their  plans  a  few  additional 
internal  revenue  taxes,  including  a  small  tax  pon  incomes  de- 
rived from  certain  corporate  investments.  These  new  assess- 
ments are  not  only  absolutely  just  and  easily  borne,  but  they 
have  the  further  merit  of  being  such  as  can  be  remitted  with- 
out unfavorable  business  depression  whenever  the  necessity 
of  their  imposition  no  longer  exists." 

It  is  uncertain  to  which  committee  the  President  here  re- 
ferred. Senator  Hill  stated  subsequently  that  at  the  date  of 
the  measure  "neither  the  full  committee  of  Ways  and  Means 
nor  the  Democratic  members  thereof,  had  agreed  upon  any 
income  tax  or  other  internal  taxation,"  ^  and  he  characterized 
the  statement  of  the  President  as  "both  inaccurate  and  pre- 
mature." The  ways  and  means  subcommittee  on  internal 
revenue  had,  however,  been  considering  an  income  tax,  and 
had  heard  various  witnesses  on  the  subject,  among  them,  in 
October,  Mr.  Shearman,  who  had  suggested  a  tax  on  incomes 
from  land  and  certain  corporations.^  In  Secretary  Carlisle's 
report  reference  is  also  made  to  the  possibility  of  an  income 
tax,  but  limited  to  incomes  from  corporations.^    On  Deceni- 

«  Congressional  Kecord  oontaining  the  rrocteMngs  and  Debates  of  the  j.,-</ 
Con);re^s,  jd  S,'ss>on.     WashiiiKtim,  lS(u,  v.il.  2f),  i>.  3558. 

■^  This  testimony  was  publishcvl  as  . /  Just  and  PraUnahle  Intome  Tax.  By 
Hon.  Thon.as  G.  Shearman,  before  the  Ways  anil  Means  Subcommittee  on 
Internal   Revenue.     Washington,   l8.),5,  21   p]). 

'•  Keport  of  the  Secretary  of  the  Treasury  for  iS,iJ.  Washington,  1S93,  p.  b  xsiii. 
!n  N..v,-...lK-r,  Sfcretarv  Carlisle  ha.l  received  from  Smith,  the  assi^^t.int  register 
uf  the  treasury,  a  document  containing  his  /.     'ory  of  the  Income  1  ax. 


^ssF^t:^'  -1 


The  Income  Tax  of  iSg^ 


497 


ber  19,  in  fact,  the  committee  of  ways  and  means  submitted  a 
tariff  bill  which  contained  no  reference  to  an  income  tax,  and 
on  January  8  the  debate  on  the  tariff  began.  The  house 
adopted  a  resolution  that  on  January  15  the  bill  should  be 
read  and  be  open  to  amendment,  and  that  on  January  29  the 
bill,  with  all  amendments  recommended  or  pending  in  the 
committee  of  the  whole,  should  be  reported  to  the  house,  and 
that  two  hours'  debate  only  be  allowed,  "whereupon  the  vote 
shall  be  taken."  * 

Although  the  record  shows  that  three  separate  income  tax 
bills  were  introduced,  one  by  Bretz  on  December  19,  to  levy 
an  income  tax  in  order  to  pay  pensions,  one  by  Davis  on 
December  20,  and  one  by  Johnson,  of  Ohio,  on  January  3, 
designed  to  impose  a  tax  on  the  income  from  invested  capi- 
tal,2  the  chairman  reported  to  the  committee  of  the  whole  on 
January  22  that  no  income  tax  amendment  to  the  tariff  bill 
had  been  received  by  him.^  On  January  29,  however,  the 
day  fixed  for  the  vote,  Mr.  McMillin  of  Tennessee,  chairman 
of  the  subcommittee,  submitted  an  income-tax  amendment 
to  the  Wilson  Bill,  providing  for  a  two  per  cent  tax  on  all 
incomes  over  four  thousand  dollars,  to  be  payable  by  individ- 
uals and  corporations  alike.* 

In  his  speech  explaining  the  amendment,^  McMillin  pre- 
sented virtually  all  the  arguments  in  favor  of  the  tax.  He 
started  out  by  calling  attention  to  the  abundant  crops  and, 
referring  to  the  aftermath  of  the  crisis  of  1893,  asked  :  "  Why 
is  it  that  in  the  midst  of  plenty  we  are  starving  ? "  The 
answer  he  gave  was,  the  misdeeds  of  the  Republican  party 
and  c.  jccially  their  tariff  policy.  lie  summed  up  his  indict- 
ment against  the  tariff  by  stating  that  "want,  not  wealth, 
pays  the  tax,"  and  that  the  time  had  come  to  "  put  more  tax 
upon  what  men  have,  less  on  what  they  need."  Referring  to 
the  recent  growth  of  revenue  and  expenditures,  he  wcjit  on  to 

'  Co>ii;>  eisiontt!  Kecor,/,  >/.  r//.,  p.  572. 

■•2  Ilousf  liills  nos.  4S61,  4898,  an.l  4955.  •  t>/.  nf-,  p.  II93- 

*  The  .■iiiifndment  will  be  found  in  </■.  <»/.,  pp.  1494  et  i,y 
•''  The  speich  wiii  be  fuuiiu  in  <i/.  •11.,  vui.  .-o,  <///i //,//.< ,  \-\'.  41 1  "'  -o/. 
2  K 


%:r^  'w^ 


w 


.  wSl»> .. 


^^S 


'i-HBi,' 


m' 


eJ?1 


498 


The  Income  Tax 


say:  "I  ask  of  any  reasonable  person  whether  it  is  unjust 
to  expect  that  a  small  per  cent  of  this  enormous  revenue  shall 
be  placed  upon  the  accumulated  wealth  of  the  country  instead 
of  placing  all  upon  the  consumption  of  the  people.  .  .  .  The 
people  of  the  United  States  do  not  ask  that  all  of  the  revenue 
shall  be  placed  on  accumulated  wealth.  They  do  not  demand 
that  even  one  fourth  of  it  shall  be  placed  there.  But  they  do 
insist  that  it  is  not  unreasonable  or  unjust  to  require  that  a 
vi'ry  small  proportion  of  it  shall  be.  .  .  .  We  do  not  come 
here  in  any  spirit  of  antagonism  to  wealth.  ...  It  is  not  a 
proposition  to  put  an  undue  embargo  upon  wealth,  but  it  is 
to  make  the  wealth  that  is  accumulated  in  this  country  pay 
some  share  of  the  expenses  of  Government.  .  .  .  My  friends, 
are  we  going  to  put  all  of  this  burden  on  the  things  men  eat 
and  wear  and  leave  out  those  vast  accumulations  of  wealth .' 
.  .  .  And  yet,  when  it  is  proposed  to  shift  this  burden  from 
those  who  can  not  bear  it  to  those  who  can ;  to  divide  it 
between  consumption  and  wealth ;  to  shift  it  from  the  laborer 
who  has  nothing  but  his  power  to  toil  and  sweat,  to  the  man 
who  has  a  fortune  made  or  inherited,  we  hear  a  hue  and  cry 
raised.  ...  I  would  be  most  reluctant  to  use  the  power  of 
government  to  tax  wealth  unjustly.  But  I  am  also  unwilling 
to  let  wealth  escape  all  governmental  taxation.  ^ " 

Referring  to  the  "  colossal  fortunes  amassed  as  were  never 
concentrated  at  any  other  age  or  in  any  other  country  of  the 
world,"  and  calling  attention  to  the  fact  that  "in  a  single  life- 
time fortunes  are  gathered  together  here  by  protection,  and 
the  tribute  that  it  levies  on  the  many  for  the  enrichment  of  the 
few,"  he  asked :  "  Are  we  to  be  told,  with  all  this  staring  us 
in  the  face,  with  all  the  blessings  that  have  been  showered  on 
those  who  have  been  able  to  thus  accumulate  what  would 
have  made  Croesus  envy  us,  that  it  is  a  sacred  thing  that  we 
shall  not  invade,  and  that  these  fortunes  shall  go  untouched 
for  governmental  purposes,  forever  and  aye.'  I  do  not  be- 
lieve it." 

This  was  the  fundamental  reason  for  the  tax.     And  the 

'  Congressional  Record,  op.  cit.,  p.  415. 


The  Income  Tax  of  1894 


499 


result,  in  his  opinion,  would  be  "  to  diminish  the  antipathies 
that  now  exist  between  the  classes.  .  .  .  When  each  citizen 
sees  that  every  other  citizen  is  paying  to  perpetuate  the  bless- 
ings of  freedom  in  proportion  to  the  wealth  he  possesses, 
there  will  be  no  heed  given  to  iconoclastic  complaint,  which 
finds  expression  in  violence,  and  threatens  the  very  founda- 
tions upon  which  our  whole  institutions  rest." 

The  minor  reason  that  McMillin  gave  was  what  he  called 
the  flexibility  of  the  tax,  or  what  is  more  commonly  termed 
the  elasticity  of  the  revenue  system.  Pointing  out  that  this 
was  the  great  result  achieved  by  the  English  tax,  he  stated 
that  in  the  United  States  we  must  look  forward  to  steady 
expenditures  and  fluctuating  revenues.  "  Make  the  tariff  what 
it  should  be,  and  regulate  revenues  by  changing  internal 
revenue  taxes.  This  tax  -an  be  raised  and  lowered  with- 
out affecting  business.  Tariff  rates  can  not  be."  McMillin 
thereupon  proceeded  to  take  up  some  of  the  objections  to  the 
tax.  With  reference  to  the  charge  of  inquisition,  he  stated 
that  the  income  tax  was  not  more  inquisitorial  than  certain 
parts  of  the  tariff,  and  surely  not  more  so  than  the  entire  sys- 
tem by  which  the  state,  country,  and  municipal  revenues  were 
collected.  "  The  American  people  will  not  accept  this  as  a 
special  reason  why  we  should  for  a  long  period  put  all  the 
federal  taxes  upon  consumption  and  none  upon  accumula- 
tions." Finally,  in  answer  to  the  argument  that  the  income 
tax  is  a  tax  upon  thrift,  he  pointed  out  that,  on  the  contrary, 
"  Every  citizen  is  placed  on  an  equality  by  this  proposition. 
This  law  says  :  '  As  you  have  been  prospered,  so  pay.  As  you 
have  received  the  blessings  of  the  government,  contribute 
to  its  support.  As  you  have  been  enabled  to  accumulate  this 
wealth  by  the  blessings  of  free  institutions,  contribute  some- 
thing to  perpetuate  them.'  How  can  that  be  called  a  penalty 
on  thrift.?" 

§  2.    T//e  Discussion  in  Congress 
The  introduction  of  the  amendment  led,  as  was  natural, 
to  a  fierce  discussion.     The  opponents  of  the  tax  presented 


Si^^r^^^'^^ 


50O 


The  Income  Tax 


vigorous  arguments,  many  of  which  were  well  put  by  Bourke 
Cockran  of  New  York.  Ray  quoted  with  some  effect  from 
the  Democratic  criticism  of  the  tax  during  the  Civil  War :  "  It 
is  not  a  proposition  to  tax  property,  accumulations  of  wealth, 
but  mind  and  energy.  It  is  a  measure  that  will  encourage 
shiftlessness  and  idleness."  Ray  thought  that  the  weakness 
of  the  income  tax  was  sufficiently  exposed  by  characterizing 
it  as  "a  twin  sister  of  free  trade."'  Walker,  of  Massachu- 
setts, complained  that  "  the  income  tax  takes  from  the  wealth 
of  the  thrifty  and  enterprising,  and  gives  to  the  shiftless  and 
the  sluggard."^  Several  speakers,  like  English  and  Dunn, 
took  refuge  in  Senator  Thurman's  objection  to  the  Civil  War 
income  tax,^  that  it  would  ultimately  be  shifted  to  the  poor, 
and  that  they,  therefore,  would  bear  the  burden.  Somewhat 
inconsistently,  however,  Dunn  contended  that  "the  mad 
policy  of  the  Democrats  would  create  such  a  financial  revo- 
lution in  this  country  as  would  shake  the  government  to  its 
very  foundations."  *  English,  in  addition,  prophesied  that 
"  before  three  years  have  passed,  if  this  measure  shall  have 
become  law,  you  will  repeal  it  amid  the  jeers  and  execiations 
of  the  people."  ^ 

Perhaps  the  strongest  language  that  was  used  in  opposi- 
tion may  be  found  i'.i  the  speech  of  Adams,  of  Pennsylvania. 
"An  income  tax!  A  tax  so  odious  that  no  administration 
ever  dared  to  impose  it  except  in  time  of  war ;  and  you 
will  find  that  the  people  will  not  tolerate  it  in  time  of  peace. 
It  is  unutterably  distasteful  both  in  its  moral  and  material 
aspects.  It  does  not  belong  to  a  free  country.  It  is  class 
legislation.  Do  you  wish  to  put  a  tax  upon  thrift  and  impose 
a  ])enalty  upon  success  ?  Do  you  desire  to  offer  a  reward  to 
dishonesty  and  to  encourage  perjury?  The  imposition  of  the 
tax  will  corrupt  the  people.     It  will  bring  in  its  train  the  spy 


'  Concessional  A'tiorJ,  of,  cit.,  p.  ifioo. 

-  ('/.  lit.,   11150.     Walker's  spicch  was  separately  puliii^^he'l  under  the  title, 
The  Income   /\i.r.     Remarks  uf  Hon.  J.  II.  Walker.     Washin)»t'in,  1S94. 
■J  ^v  fut'ra.  n.  xbl.  *  Op.  -sit..  <if*f'emii.x,  v    2oS. 

*  Op.  at.,  appendix,  p.  188. 


The  Income  Tax  of  i8g4 


501 


and  the  informer.  It  will  necessitate  a  swarm  of  ofllicials 
with  inquisitorial  powers.  It  is  a  direct  step  toward  centrali- 
zation, of  which  our  Democratic  friends  profess  such  horror. 
It  is  expensive  in  its  collection  and  cannot  be  fairly  gathered; 
and  finally,  it  is  contrary  to  the  traditions  and  principles  of 
republican  government.  Mr.  Chairman,  pass  this  bill,  and 
the  Democratic  party  signs  its  death  warrant." ' 

All  this  opposition,  however,  was  hopeless.  Wilscm,  the 
author  of  the  tariff  bill,  and  who  originally  suggested  a  cor- 
poration tax  as  preferable  to  an  income  tax,^  stated  his  views 
as  follows:  "I  did  not  concur  in  the  policy  of  attaching  an 
income-tax  bill  to  the  tariff  bill.  I  have  had  some  doubt  as 
to  the  expediency  of  a  personal  income  tax  at  the  present 
time,  but  when  the  Committee  decided  otherwise,  I  threw  in 
my  fortunes  earnestly  and  loyally  with  them  because  I  had 
never  been  hostile  to  the  idea  of  an  income  tax."  He  denied 
that  the  bill  involved  cither  class  or  sectional  legislation. 
"Why,  sir,  when  for  a  generation  New  Kngland  has  been 
sending  out  from  her  colleges  men  imbued  with  the  doctrine 
that  an  income  tax  is  a  wise  and  equal  system  of  taxation, 
when  through  the  text  books  of  her  great  economists,  her 
Sumner,  and  Walker  and  Perry,  she  has  taught  that  doctrine 
in  the  colleges  of  the  South  and  West,  she  cannot  justly  com- 
plain that  her  own  teachings  are  used  as  a  sectional  weapon 
against  her.  But,"  he  added,  "  I  am  in  close  touch  with 
the  men  of  New  York,  —  I  am  in  close  touch  with  the  men  of 
the  West,  —  I  am  bone  of  the  bone  of  the  men  of  the  .South. 
And  I  can  affirm  that  in  all  my  conferences  with  them  I  have 
heard  no  man  suggest  as  the  motive  for  this  scheme  of  taxa- 
tion that  he  supported  it  in  any  sectional  spirit,  or  with  any 
feeling  of  resentment  or  hostility  to  any  part  of  the  country."* 

The  other  speakers  added  but  little  to  the  points  that  had 
been  made  by  McMillin.     Hail,  of  Missouri,  however,  who, 

1  Of>.  (it.,  ii/'feiii/i.r,  p.  207. 

-  Cf.  his  article,  ".\n  Inciine  Tax  on  fiqJMrations"  in  the  S'orth  .Imrricjn 
J\r.ii-u;  vol,  15.S  (Jamiary,  1S94         >.  1  fl  "y. 

"  i-ongresitonai  ktcord,  of.  1//.,    /peiiuijc,  \>.  204. 


502 


Tlie  Income  Tax 


like  many  others,  made  much  of  the  "  flexibility  "  argument 
advanced  by  McMillin,  emphasized  the  popular  sentiment 
in  its  favor.  "  What  the  opponents  of  an  income  tax  have 
most  to  dread  is  the  education  of  the  people.  If  we  had 
been  able  to  put  an  income  tax  plank  in  the  Chicago  plat- 
form, and  had  had  the  time  to  educate  the  people  on  this 
question,  there  is  no  question  that  we  would  have  carried 
this  country,  and  carried  it  like  a  cyclone."  '  The  Populists, 
through  Ponce  and  Kem,  attempted  to  introduce  a  graduated 
scheme.  Kem  desired  the  exemption  to  be  considerably  re- 
duced, and  the  tax  to  be  graduated  so  that  instead  of  raising 
the  thirty  millions  estimated  by  the  commissioner  of  Internal 
Revenue,  it  would  raise  at  least  one  hundred  millions.' 

But  the  time  for  discussion  was  limited.  After  a  short 
debate  in  committee  of  the  whole,  the  bill  was  reported  to  the 
house  on  January  30,  and  only  three  hours'  debate  was  per- 
mitted. The  general  temper  of  the  house  is  well  illu.strated 
by  the  grandiloquent  peroration  of  De  Armond,  of  Missouri. 
"  The  passage  of  the  bill  will  mark  the  dawn  of  a  brighter 
day,  with  more  of  sunshine,  more  of  the  songs  of  birds,  more 
of  that  sweetest  music,  the  laughter  of  children  well  fed,  well 
clothed,  well  housed.  Can  we  doubt  that  in  the  brighter, 
happier  days  to  come,  good,  even-handed,  wholesome  De- 
mocracy shall  be  triumphant.  God  hasten  the  era  of  equal- 
ity in  taxation  and  in  opportunity.  And  God  prosper  the 
Wilson  bill,  the  first  leaf  in  the  glorious  book  of  reform  in 
tax.ition,  the  promise  of  a  brightening  future  for  those  whose 
genius  and  labor  create  the  wealth  of  the  land,  and  whose 
courage  and  patriotism  are  the  only  sure  bulwark  in  the 
defense  of  the  Republic." ^  The  bill  passed  by  a  majority  of 
204  against  140. 

On  February  2  the  bill  was  sent  to  the  Senate  and  referred 
to  the  committee  on  finance.  On  March  20  the  chairman, 
Senator  Voorhces,  reported  it  to  the  Senate  with  amendments, 
and  shortly  thereafter  the  consideration  of  its  provisions  was 


*  Coiigreisioitiil  Knor,/,  op.  lif.,  p.  161I. 
''  Op.  (it.,  ,ipj<eniiix,  pp.  293  et  Sf,/. 


'  Of.  (it.,  appendix,  p.  406. 


sH 


The  Income  Tax  of  i8g4 


503 


begun  in  the  committee  of  the  whole.  Before  the  bill  was  read, 
Senator  Hill  attacked  the  income  tax  provisions,  in  a  long 
speech  on  April  9,  in  which  he  marshalled  all  jjossible  argu 
ments  against  it.  One  of  these  deserves  to  be  quoted  :  "  Kuro- 
pean  professors  announce  to  American  professors,  who  pub- 
lish and  believe  it,  the  birth  of  a  brand  new  political  economy 
for  universal  application.  From  the  midst  of  their  armed 
camps  between  the  Danube  and  the  Rhine,  the  professors 
with  their  books,  the  Socialists  with  their  schemes,  tiie  anar- 
chists with  their  bombs,  are  all  instructing  the  people  of  the 
United  States  in  the  organization  of  society,  the  doctrines 
of  democracy,  and  the  principles  of  taxation.  No  wonder  if 
their  preaching  can  find  ears  in  the  White  House."'  After 
this  outburst  of  Senator  Hill,  it  was  not  until  June  21  that 
the  income  tax  provisions  were  taken  up,  although  on  the 
preceding  day  Senator  Peffer,  of  Kansas,  speaking  for  the 
Populists,  offered  an  amendment  providing  for  a  graduated 
tax,  and  Senator  Hoar  introduced  an  amendment  exempting 
the  salaries  of  federal  judges.* 

The  debate  was  opened  by  Senator  Hill,  who  from  now  on 
became  the  leading  opponent  of  the  income  tax,  and  who 
disclosed  his  disagreement  with  his  Democratic  colleagues. 
He  submitted  a  petition  signed  by  a  number  of  prominent 
Democratic  business  men  of  New  York,  against  the  income 
tax,  which  "  represents  the  abandonment  of  the  traditional 
democratic  policy  in  favor  of  a  socialistic  policy,  which  has 
failed  to  receive  popular  approval."'*  Hill  denied  that  the 
English  income  tax  was  a  precedent.  "  It  was  instituted  as 
a  war  tax,  and  defended  as  a  war  tax;  it  is  obnoxious  to  the 
English  people,  and  no  English  statesman  of  any  re[)Ute  has 
ever  defended  it,  except  as  a  tax  to  be  levied  only  in  tine  of 
war,  or  to  meet  subsequent  deficiencies  traceable  to  the  enor- 
mous expenditures  of  war."  Income  taxes  "seem  to  be  the 
necessary  accompaniment  of  monarchical  governments,  but 
they  are  justly  regarded  as  odious  and  unnecessary  in  free 
republics.  .  .  .     F"rance  has  no  income  tax  because  she  has 

"  0/>.  tit,  p.  3564.  -  Op.  ril.,  pp.  6577-65 78.  «  Op.  at.,  p.  6612. 


504 


The    ^  tcome  Tax 


learned  to  love  liberty,  to  hate  inquisitions,  to  detest  class 
legislation,  and  to  respect  the  rights  of  property."  In  the 
main,  however,  the  arguments  of  Senator  Hill,  Senator  Hoar, 
and  the  other  important  opponents  of  the  tax,  did  scarcely 
more  than  elaborate  the  points  that  had  been  made  by  Adams 
in  the  House. 

Senator  Sherman's  attitude,  however,  is  interesting  because 
of  his  opposition  to  the  abolition  of  the  income  tax  two  decades 
before.  Sherman  stated  :  "  I  feel  precisely  as  I  expressed 
myself  twenty  years  ago,  that  it  was  a  tax  no  man  should 
complain  of.  If  the  circumstances  and  exigencies  demanded 
it,  or  the  interests  of  our  people,  the  need  of  revenue  or  tlie 
public  credit,  or  any  public  interest  demanded  it,  I  would  vote 
for  it  without  hesitation.  I  do  not  by  any  means  regard  the 
income  tax  as  the  worst  feature  of  this  bili,  and  I  should  have 
no  objection  to  it,  as  I  say,  if  there  were  any  real  demand  for 
it.  But  there  is  not." '  What  he  objected  to,  however,  was 
the  high  exemption.  "  In  a  republic  like  ours,  where  all  men 
are  equal,  this  attempt  to  array  the  rich  against  the  poor  or 
the  poor  against  the  rich  is  socialism,  communism,  devilism." 
He  thereupon  proceeded  to  advance  the  idea  that  while  the 
income  tax  is  in  essence  a  just  tax,  it  ought  to  be  levied  by 
the  .states  and  not  by  the  federal  government.  "  I  do  not 
say  that  an  income  tax  is  not  a  proper  and  desirable  tax  to 
be  levied,  but  only  that  it  is  not  a  proper  and  desirable  tax  to 
be  levied  now  by  the  United  States.  It  should  be  left  to  the 
states  as  a  source  of  revenue,  to  be  used  by  them  whenever 
they  choose  to  do  so." 

The  debate  in  the  Senate  continued  for  six  days,^  and  va- 
rious amendments  were  proposed.  The  first,  suggested  by 
the  committee,  was  an  important  one,  limiting  the  operation 
of  the  tax  to  January  i,  1900.^     This  was  carried.     Senator 


'  CoHgressioital  Record,  op,  cil.,  p.  6695. 

2  I'nr  the  (lel)ate  .m  the  successive  days,  see  the  Congressional  Kuord 33  fol- 
lows: June  21,  pp.  (iriio  et  seq.:  June  22,  pp.  6684  et  seq.;  June  23.  pp.  6764 
et  seq.;  June  26,  pp.  6804  etse,/.;  June  27,  pp.  6S65  d  seq.;  June  28,  pp.  6920 
ei  ifq-  "'  Op.  lit.,  p.  6631. 


The  Income  Tax  of  18^4 


505 


Peffer,  who  claimed  the  income  tax  as  a  Populist  measure, 
moved,  but  unsuccessfully,  to  have  it  begin  with  an  exemp- 
tion of  one  thousand  dollars  and  to  have  the  rate  rise  progres 
sively  from  one  to  five  per  cent.  On  the  other  hand,  the 
Senate  adopted  a  large  number  of  amendments  providing  for 
exemptions  of  various  kinds,  and  also  somewhat  modifying 
the  administrative  provisions.  One  of  the  most  important 
amendments  was  that  which  deducted  from  the  taxable  income 
of  corporations  the  amounts  payable  for  interest  on  bonds. 

The  opponents  of  the  bill  knew  that  their  opposition  was 
futile.  In  vain  did  Senators  Hill  and  Hoar  attempt  to  raise 
the  bogie  of  interference  with  state  rights.  Said  Hill,  "No 
such  federal  aggrandizement  was  ever  projected,"  and  he 
referred  to  this  "  insidious  and  deadly  assault  upon  state 
rights,  state  powers,  and  state  independence."  *  Hoar  de- 
clared the  "income-tax  scheme  the  most  conspicuous,  far- 
going,  drastic,  sweeping  assertion  of  national  power  against 
the  state  power,  state  interest,  and  state  functions  which  can 
be  found  in  our  legislative  history.'  ^  Hut  this  attempt  to 
recall  the  Democratic  party  to  its  old  constitutional  position 
was  unavailing.  The  bill  passed  the  Senate  on  July  3  by  a 
vote  of  39  to  34.  After  an  unsuccessful  endeavor  to  secure 
agreement  in  conference,  the  House  finally  receded  from  its 
opposition,  and  on  August  13  accepted  all  the  Senate  amend- 
ments. On  August  28  the  tariff  bill  became  a  law,  without 
having  received  the  approval  of  the  President. 

From  this  consideration  of  the  fortunes  of  the  income  tax 
bill  in  Congress  it  is  clear  what  were  the  real  reasons  under- 
lying its  adoption.  The  self-imposed  mission  of  the  Demo- 
cratic party  was  to  reduce  and  equalize  taxation.  Although 
the  Democrats  at  first  proposed  simply  to  lower  the  tariff  to 
a  revenue  basis,  it  was  soon  recognized  that  the  reductions 
would  be  more  radical.  Looked  at  merely  from  the  stand- 
point of  convenience  and  ease  of  collection,  the  simple  method 
of  making  good  a  deficit  in  the  tarifT  revenue  would  have 
been  to  modify  the  system  of  internal  revenue.     This  plan, 

'  l>/.  ,('/..  p.  4351.  -  0/>.  cit.,  p.  6631. 


i  I 


5o6 


The  Income  Tax 


indeed,  was  advanced  by  David  A.  Wells,  and  at  one  time  it 
seemed  to  enjoy  a  reasonable  prospect  of  meeting  with  legis- 
lative approval.  Mr.  Wells  showed  that  by  leaving  the  whis- 
key tax  at  the  original  figure,  and  by  slightly  raising  the 
tobacco  tax  and  modifying  the  beer  tax,  a  very  considerable 
increase  of  revenue  might  be  secured.  But  the  project  soon 
raised  a  storm  of  opposition.  On  the  one  hand  were  the 
immense  brewery  interests,  which  objected  strenuously  to  the 
imposition  of  any  additional  burdens  on  them.  On  the  other 
hand  were  the  whiskey  interests,  which  desired  a  nominal 
increase  of  the  whiskey  tax,  in  order  to  realize  temporary 
profits,  and  perhaps  also  to  take  advantage  of  the  rate  in 
other  ways.  And  finally,  there  was  the  temperance  party, 
which  demanded  so  high  a  tax  on  whiskey  that  in  all  proba- 
bility it  would  have  reduced  the  revenue.  As  a  matter  of 
fact,  the  new  law  increased  the  whiskey  tax,  raising  it  from 
ninety  cents  to  5i.io  a  gallon,  and  furthermore  imposed  a 
duty  of  two  cents  a  pack  on  playing  cards.  But  neither  of 
these  changes  materially  affected  the  revenue. 

Since,  therefore,  the  proposed  tariff  schedules  would  have 
meant  a  considerable  deficit,  and  since  no  relief  was  to  be 
expected  from  the  internal  revenue  system,  the  proposition 
to  make  good  the  difference  by  introducing  the  income 
tax  received  a  hearty  welcome.'  But  while  the  anticipated 
deficit  gave  the  Western  and  Southern  representatives  their 
opportunity,  it  was  not  so  much  the  idea  of  increasing  the 
revenue  as  that  of  correcting  inequalities  in  the  tax  system 
that  was  really  in  their  mind.  The  truth  of  this  assertion  is 
evident  when  we  reflect  on  the  fortunes  of  the  Wilson  bill  in 
the  Senate.  The  Gorman  bill  put  sugar  back  on  the  dutiable 
list,  and  made  many  other  changes  which  so  weakened  the 


'  In  April,  1894,  Mr.  Worthington  C.  Ford,  chief  of  the  Bureau  of  Statistics  in 
the  Treasury  Department,  sul)mittc(l  an  estimate  of  the  probable  yitl.l  of  the  tax. 
He  thought  that  "the  revenue  from  private  incomes  will  he  small  and  will 
hardly  cover  the  cost  of  collection  ;  but  that  the  revenue  from  corporations 
would  ranf;e  between  twelve  millions  as  a  minimum  and  thirtv.p.ir.e  mi'.!ii-.n«  3=  a 
maximum.' —jj,y  Cong.,  iJ Sess.,  Mis.  Doc,  no.  232,  p.  9. 


The  Income  Tax  of  i8g4 


507 


radical  nature  of  the  House  bill  that  all  danger  of  a  deficit 
seemed  to  be  at  an  end.  The  income  tax  was  no  longer  a 
fiscal  necessity.  Yet  all  attempts  to  expunge  it  from  the 
bill  were  utterly  unavailing.  The  farmers'  influence  was  too 
strong. 

Opposition  to  the  tax  came,  as  was  natural,  from  the  great 
cities  of  the  East.  The  commercial  and  financial  centres 
professed  to  fear  that  their  prosperity  might  be  jeopardized. 
The  large  dailies  were  filled  with  indignant  protests,  and  the 
chambers  of  commerce  in  New  York  and  other  cities  voiced 
their  anger  in  long  and  vehement  resolutions.  Even  the 
leading  Democratic  journals  in  the  North  and  East  did  every- 
thing in  their  power  to  have  the  income  tax  sections  struck 
out  of  the  tariff  bill. 

The  contest  was  analogous  to  that  over  the  income  tax  in 
England.  For  in  England  also  the  opposition  was  from  the 
very  beginning  sectional  rather  than  political.  In  reading  the 
protests  of  the  American  chambers  of  commerce  we  seem  to  be 
reading  the  manifestoes  issued  in  the  first  years  of  the  nine- 
teenth century  by  the  corporation  of  the  City  of  London, 
and  the  resolutions  adopted  by  the  anti-income  tax  leagues 
many  decades  later  in  London,  Manchester,  and  Birmingham. 
For  there  also  the  line  was  drawn  not  by  party  affiliation, 
but  by  class  interests  which  had  not  yet  found  expression  in 
party  dogmas. 

So  it  was  that  here,  while  the  Republican  journals  in  the 
East  opposed  the  tax,  the  opposition  was  due  not  to  the  fact 
that  they  were  Republican,  but  to  the  fact  that  they  repre- 
sented the  great  industrial  centres.  In  the  West  there  was 
by  no  means  the  same  opposition  even  among  Republicans. 
The  sentiment  in  favor  of  some  form  of  income  taxation  was 
so  overwhelming  among  the  mass  of  the  voters  that  the 
Republican  leaders  preferred  to  preserve  silence  and  not  run 
the  risk  of  opposing  a  popular  measure.'  Thus  the  vehement 
Eastern  opposition,  instituted  by  the  Republicans  and  more 

'  Even  m  the  East  the  Rcpulilican  platforms  of  1894  treated  the  tax  very  ten- 
derly, and  said  nuthing  about  its  speedy  abolition. 


5o8 


The  Income   Tax 


or  less  openly  sympathized  with  by  the  Democrats,  was 
wholly  ineffectual.  No  feature  of  the  tariff  bill  was  ever  in 
smaller  danger  of  bein>i;  successfully  opposed  than  were  the 
income  tax  sections ;  for  revenue  considerations  were  the  pre- 
text for  their  introduction,  not  the  cause. 


§  3.    An  Analysis  of  t/w  Laiv 

The  new  law  '  was  copied,  with  a  few  important  exceptions, 
almost  word  for  word  from  the  old  lej^islation  of  the  Civil 
War  period.  We  shall  therefore  only  summarize  its  chief 
provi.sions. 

The  tax  was  to  begin  on  January  i,  1895,  and  to  continue 
for  five  years.  The  rate  was  two  jjcr  cent  on  the  excess  over 
$4000.  It  was  levied  upon  all  "gains,  profits  and  incomes 
derived  from  any  kind  of  property,  rents,  interest,  dividends, 
or  salaries,  or  from  any  profession,  trade,  employment  or 
vocation."  The  period  on  which  the  tax  was  v.omputed  was 
the  preceding  calendar  year.  The  tax  applied  to  the  entire 
income  of  all  citizens  of  the  Uniteil  States,  whether  resident 
or  non  resident,  and  to  all  persons  residini^  within  the  United 
States ;  and  it  also  applied  to  so  much  of  the  income  of 
persons  residing  abroad  as  was  derived  from  property  or  busi- 
ness within  the  United  States.''' 

A  long  section  was  devoted  to  explaining  what  was  to  be 
considered  income.  The  only  points  that  need  mention  here 
are  the  following  :  Income  was  deemed  to  include  interest  on 
all  securities  except  such  federal  bonds  as  were  expressly 
exempted  from  taxation  by  the  law  of  their  issue.  Profits 
realized  from  the  sale  of  real  estate  were  defined  to  be  income 
only  when  the  real  estate  had  been  purchased  within  two 
years  previous.  The  amount  of  sales  of  all  vegetable  and 
animal  produce  grown  or  produced  by  the  taxpayer  himself 
was  considered  income,  but  the  expenses  of  production  were 
deducted,  and  the  amount  consumed  directly  by  the  family 
was   not  included.     All  personal  property  acquired  1j\   gift 


'  Act  of  August  28,  lS(J4,  sees.  27-J7. 


»Scc. 


27- 


The  Income  Tax  of  ;,S'y^ 


509 


or  inheritance  was  declared  to  be  income.  In  computing  in- 
come, the  necessary  expenses  actually  incurred  in  carrying  on 
the  occupation  were  deducted.  A  similar  deduction  was  made 
for  interest  on  indebtedness,  for  los.ses  actually  sustained,  and 
for  worthless  debts.  Hut  no  deduction  was  permitted  for 
permanent  improvements  or  better,  'nts  to  real  estate.  Al- 
though taxes  might  be  deducted,  the  term  was  held  not  to 
include  the  amount  paid  for  spe.ial  assessments.  In  cases 
where  the  ta.x  had  already  been  paid  by  other  parties,  the 
individual  was  not  compelled  to  include  that  income  in  his 
return.  This  would  apply  to  the  .salaries  of  all  officials  of  the 
United  States  government,  where  the  government  itself  was 
directed  to  withhold  the  ta.x  ;  to  the  income  received  in  the 
shape  of  dividends  on  corporate  stock,  where  the  stock  com- 
pany or  association  was  required  to  pay  the  tax  in  the  first 
instance ;  and  to  "  any  salary  upon  which  the  employer  is 
required  by  law  to  withhold  or  pay  the  tax."  '  It  was  also 
provided  that  salaries  due  to  state,  county,  or  municipal 
officers  should  be  exempt.* 

In  addition  to  this  tax  on  individuals  the  law  included  a 
tax  on  corporations,  companies,  or  associations  doing  business 
for  profit  in  the  Inited  States,  but  not  including  partner- 
ships. This  tax  was  assessed  at  the  same  rate,  but  without 
any  abatements.  It  was  levied  on  the  net  profits  or  income 
above  operating  and  business  expenses,  which  latter  were  so 
defined  as  to  comprise  not  only  ordinary  expenses  and  los.ses 
but  also  interest  on  bonded  or  other  indebtedness.  The 
income  was  deemed  to  include  all  amounts  carried  to  the 
account  of  any  fund,  or  used  for  construction,  enlargement  of 
plant,  or  any  other  expenditure  or  investment  paid  from  the 
net  annual  profit.s.^  The  corporate  income  tax  did  not  apply 
to  states,  counties,  or  municipalities ;  nor  to  charitable,  reli- 
gious, or  educational  associations;  nor  to  fraternal  beneficiary 
orders;  nor  to  building  or  loan  associations;  noi  to  mutual 
insurance  companies  ;  nor  to  savings-banks  or  societies  under 
certain  conditions. 

'  Sec.  28.     but  sec  i;      ',  p.  527.  '■'  Sec.  T,!,-  "  S<-'c.  JJ. 


5IO 


The  Income  Tax 


We  come  now  to  the  administrative  features.     All  persons 
of  lawful  age  with  an  income  over  $3500  were  required  to 
make  to  the  collector  or  deputy  collector  a  return  in  such 
form  and  manner  as  might  be  directed  by  the  commissioner 
of  internal  revenue,  with  the  approval  of  the  secretary  of  the 
treasury.     The  collector  or  deputy  collector  was  to  require 
the  return  to  be  verified  by  oath  or  affirmation.     If  he  had 
reason  to  believe  that  the  return  had  been  understated,  he 
might  increase  the  amount.     In  case  no  return  or  a  wilfully 
fraudulent  return  wr.s  made,  he  was  to  make  the  list  to  the 
best  of  his  information,  adding  fifty  per  cent  in  the  one  case 
and  one  hundred  per  cent  in  the  other.*     Appeal  might  be 
taken  from  the  deputy  collector  to  the  collector  of  the  district. 
If  still  dissatisfied,  a  taxpayer  might,  after  due  notice,  sub- 
mit  the   case,   with  all  the  papers,  to   the  commissioner  of 
internal  revenue,  whose  decision  was  final.     No  penalty  was 
to  be  inflicted  upon  any  one  for  making  a  false  return  or 
refusing  to  make  a  return,  except  after  reasonable  notice  of 
the  time  and   place  where  the  charge  might  be  heard.     A 
further   section   provided   that  in  case  a  person   refused  to 
return  his    list   or   made  a   fraudulent  return,  the  collector 
might  inspect  his  books  and  compel  the  individual,  or  any 
one  else  in  charge  of  the  books,  to  give  testimony  or  ai  swer 
interrogatories.' 

Every  corporation  or  business  association  was  required  to 
make  a  full  return  of  its  gross  profits,  expenses,  net  profits, 
amounts  paid  for  interest,  annuities  and  dividends,  amounts 
paid  in  salaries  of  less  than  $4000,  and  amounts,  with  name 
and  address  of  each  official,  paid  in  salaries  of  more  than 
S4000.3  Whenever  the  collector  or  deputy  collector  thought 
that  a  correct  return  had  not  been  made,  he  might  file  an 
afiidavit  of  such  belief  with  the  commissioner  of  internal 
revenue,  who  might  then,  after  notice  and  hearing,  issue  a 
request  to  have  the  books  inspected.  If  the  corporation 
refused  such  request,  the  collector  was  to  make  his  own  esti- 

'  Sec.  29.  2  Sec.  J4,  amending  set.  3173  of  the  Revised  Statutes. 

'■  ^cc.  35. 


Jik^^**^.'  kSf.:i 


The  Income  Tax  of  1894 


5^1 


mate  of  income,  and  add  fifty  per  cent  thereto.*  The  gov- 
ern..ient  was  required  to  withhold  the  tax  from  the  amount 
of  all  salaries  over  $4000.* 

The  tax  was  due  on  July  i  of  each  year,  and  was  levied  on 
the  income  for  the  year  that  ended  on  the  preceding  Decem- 
ber 31.  The  penalty  for  delay  in  payment  was  five  per  cent 
on  the  amount  unpaid,  together  with  interest  at  the  rate  of 
twelve  per  cent.  This  did  not  apply  to  the  estates  of  de- 
ceased, deranged,  or  insolvent  persons. 

In  order  to  insure  the  greatest  possible  secrecy,  it  was  pro- 
vided that  no  official  of  the  government  was  to  divulge  any 
fact  contained  in  the  income  return  or  to  allow  any  detail  to 
be  seen  or  examined  by  any  person  not  authorized  by  law. 
It  was  further  declared  to  be  unlawful  for  any  one  to  print 
or  publish  in  any  manner  not  provided  by  law  any  income 
return  or  part  thereof.  The  penalty  was  a  fine  not  exceed- 
ing Si 000,  or  imprisonment  not  exceeding  one  year.  But  in 
cas>  he  publication  was  due  to  any  public  official,  the  offence 
entailed  dismissal  from  office,  with  the  incapacity  thereafter 
to  occupy  any  position  under  the  government." 

Let  us  now  proceed  to  analyze  the  provisions  which  have 
been  recounted  in  all  their  baldness. 

The  first  point  that  arrests  our  attention  is  the  definition  of 
income.  The  law  differed  from  those  of  the  Civil  War  period 
in  that  it  did  not  expressly  exclude  from  income  the  rental 
value  of  the  residence  occupied  by  the  owner.  The  legislator 
of  the  Civil  War  period,  it  will  be  remembered,  assumed  that 
income  would  comprise  the  rental  value  of  the  homestead 
occupied.  A  special  provision  was  therefore  inserted  in  the 
law,  excluding  this  in  terms.  This  was  done  for  the  reason 
that,  since  a  deduction  was  permitted  from  income  for  the 
amount  of  rent  paid  for  a  dwelling  by  a  tenant,  there  would 
otherwise   be   a   gross   injustice.*     But,  as  was  pointed  out 

1  Sec.  36.  -  Sec.  :^i.  •'  Sec.  34. 

*  The  deduction  for  amount  of  rent  p.iid,  it  will  he  remembered,  was  nut  found 
in  the  law  of  1862.  hut  in  the  amendment  of  I,S6?.  The  exclusion  of  rental  value 
from  income  was  lirst  fouml  in  the  law  of  1S64. 


.«^ii'5i«2?2S2raK5a=''S£'jfWP^ 


512 


The  Income  Tax 


repeatedly  at  the  time,  the  deduction  of  rent  paid  was  unnec- 
essary. The  same  equality  might  have  been  preserved  by 
including  in  income  the  rental  value  of  the  property  occupied 
by  the  owner,  and  in  other  cases  allowing  no  deduction  for 
rent  paid.  In  the  new  law  no  one  was  permitted  to  deduct 
from  income  the  amount  of  rent  actually  paid  — which  in 
itself  was  correct  enough.  But  as  nothing  was  said  about 
including  in  income  the  rental  value  of  the  dwelling  occu- 
pied, it  is  very  doubtful  whether  it  would  have  been  included. 
This  was  manifestly  an  injustice. 

On  other  points  the  explanation  of  what  is  to  be  considered 
income  was  copied  from  the  earlier  laws.  Some  of  the  pro- 
visions were  quite  arbitrary.  Such  was  the  requirement  that 
the  profits  from  the  sale  of  real  estate  should  be  considered 
income  only  when  the  real  estate  has  been  purchased  within 
two  years  before.  Under  the  law  of  1862,  which  conldned 
no  rcierence  to  this  point,  it  will  be  remembered,  it  was  held 
that  profits  from  the  sale  of  real  estate  were  to  be  considered 
income,  irrespective  of  the  time  when  the  property  had  been 
purchased.  The  law  of  1864  specifically  provided  that  they 
were  to  be  considered  income  only  if  the  property  had  been 
bought  in  the  same  year.  Later  on,  in  1867,  the  limit  was 
fixed  at  two  years.  It  is  this  clause  which  was  followed  in 
the  law  of  1894.  Why  the  precise  period  of  two  years  should 
have  been  chosen  is  not  clear. 

A  similar  criticism  may  be  urged  against  the  provision  that 
income  was  to  include  the  sale  of  all  vegetable  and  animal 
products,  excluding  any  part  consumed  by  the  family.  It 
was  frequently  pointed  out  during  the  earlier  period  that  this 
deduction  was  illogical,  since  an  artisan  who  had  to  spend 
his  money  for  provisions  was  allowed  no  deduction.  If  the 
farmer  sold  all  his  produce,  and  then  bought  food,  he  could 
deduct  nothing ;  but  if  he  reserved  from  his  sales  an  equiva- 
lent amount  of  food,  the  deduction  was  permitted.  However, 
since  very  few  farmers  would  have  been  taxed  by  the  law 
at  all,  this  provision  made  little  difference. 

A  more  important  point  is  the  definition  of  corporate  in- 


The  Income  Tax  of  i8g4 


513 


come.  From  the  economic  point  of  view  there  is  a  distinc- 
tion between  individual  income  and  corporate  income.  In 
the  case  of  individuals,  true  taxable  property  consists  in  the 
surplus  above  indebtedness.  Net  income  can  therefore  be 
arrived  at  only  by  deducting  interest  on  debts.  But  in  the 
case  of  corporations  the  matter  is  somewhat  different.  Cap- 
ital stock  represents  in  many  cases  only  a  portion  of  the 
property,  the  remainder  being  represented  by  the  bonded 
indebtedness.  It  is  the  stock  and  bonds  together  that  repre- 
sent the  property  and  the  earning  capacity  of  the  corpora- 
tions; and  for  this  reason  the  most  advanced  tax  laws  in 
America,  as  well  as  in  Europe,  permit  an  individual  to  deduct 
his  indebtedness  or  the  interest  on  his  debts,  while  the  cor- 
poration is  assessed  on  both  bonds  and  stock,  or  on  both 
interest  and  dividends.  The  bill  as  it  came  from  the  House 
contained  a  similar  provision  ;  but  in  the  Senate  the  section 
was  so  amended  as  to  permit  corporations  to  include  interest 
on  debt  among  their  expenses.  It  is  evident,  then,  that  the 
income  tax  on  corporations  was  really  not  a  corporate  income 
tax,  but  only  a  tax  on  corporate  profits  over  and  above  fixed 
charges.  Thus  at  one  stroke  the  proceeds  from  this  source 
were  cut  down  almost  one-half. 

It  may  indeed  be  alleged  in  extenuation  that  the  corpora- 
tions, especially  the  railways,  were  already  taxed  so  heavily  in 
some  states,  and  that  their  financial  position  was  in  tne  main 
so  precarious,  that  the  imposition  of  a  tax  on  both  stocks  and 
bonds  would  have  involved  many  companies  in  ruin.  It  may 
be  said  further  that  the  provision  was  not  so  serious  as  it 
seemed,  because  the  individual  recipients  of  the  income  from 
corporate  bonds  were  supposed  to  include  those  sums  in  their 
own  returns.  On  the  other  hand,  it  must  be  conceded  that 
the  definition  of  "  income "  was  certainly  an  uneconomic 
one ;  and  that  whatever  arguments  apply  to  the  advisability 
of  making  corporations  responsible  for  the  tax  on  dividends 
apply  with  equal  force  to  the  interest  on  indebtedness. 

The  third  point  of  importance  is  that  the  law  provided,  not 
only  for  an  income  tax,  but  lor  somctiiing  over  aiui  ai)uvc  an 
3  L 


SH 


The  Income  Tax 


income  tax,  namely,  a  tax  on  successions.  As  we  have  learned 
above.i  income  has  come  in  practice  to  denote  a  regular  and 
periodic  return.  It  is  for  this  reason  that  many  income  tax 
laws  estimate  income  at  an  average  of  a  certain  number  of 
years,  as  the  last  three  or  five  or  seven  years.  In  that  way 
the  'at  years  are  balanced  by  the  lean  and  a  greater  degree 
of  j  uslice  is  attained.  Although  this  scheme  was  not  adopted, 
the  new  law,  nevertheless,  was  in  the  main  based  on  the  idea 
of  annual  recurring  profits.  It  is  surprising,  then,  to  find  a 
provision  which  imposes  a  tax  upon  the  value  of  all  "personal 
property  acquired  by  gift  or  inheritance  "  during  the  year.  If 
anything  is  irregular  and  unperiodic,  it  is  an  inheritance. 
The  income  from  the  inheritance  is  indeed  regular ;  but  the 
bw  taxed  not  only  the  income  from  the  inheritance,  but  the 
iniieritance  itself.  From  the  standpoint  of  an  income  tax, 
this  was  not  only  illogical,  but  constituted  double  taxation. 
In  all  the  other  income  taxes  of  the  world  inheritances  are 
either  expressly  or  impliedly  excluded.  It  may,  indeed,  have 
been  desirable  to  impose  an  inheritance  tax  in  addition  to  the 
income  tax.  But  in  that  case  it  should  have  been  discussed 
on  its  own  merits  and  not  smuggled  into  an  odd  corner  of  the 
bill. 

It  may  be  noticed  in  passing  that  "  inheritance,"  strictly 
constiued,  applies  only  to  real  estate  passing  by  descent. 
The  term  "inheritance  tax  "  is  popularly  applied  in  America  to 
a  tax  on  the  devolution  of  realty,  whether  by  will  or  by  intest- 
acy, and  is  sometimes  applied  also  to  a  tax  on  the  devolution 
of  personalty.  But  the  new  law  used  the  term  in  a  restricted 
sense.  The  provision  did  not  apply  to  real  estate  at  all,  and 
speaks  of  "  personal  property  acquired  by  inheritance."  This 
is  very  confusing.  Passing  over  this  misnomer,  however,  the 
exemption  of  real  estate  was  due  to  the  feeling,  alluded  to 
above,  on  the  part  of  the  mass  of  the  small  real-estate  owners 
that  they  were  already  bearing  more  than  their  share  of  tax- 
ation. Whether  or  not  the  passage  of  this  succession  tax  law 
was  wise,  we  shall  consider  later.    The  point  which  we  desire  to 

'  I 'age  20. 


The  Income  Tax  of  18^4 


515 


emphasize  here  is  that  the  law  of  1894  provided  not  only  for 
an  income  tax,  but  also  for  a  succession  tax,  and  that  the  in- 
clusion of  "  gifts  and  inheritances  "  in  intome  is  unscientific. 

The  fourth  consideration  which  arrests  our  attention  is  that, 
from  the  American  point  of  view,  the  law  provided  for  a  cor- 
poration tax  as  well  as  an  income  tax.  We  say  from  the 
American  point  of  view,  because  we  are  accustomed  to  make 
a  distinction  between  a  corporation  tax  and  other  taxes. 
Strictly  speaking,  the  antithesis  is  not  between  a  corporation 
tax  and  an  income  tax  or  a  property  tax,  but  between  a  tax 
on  corporations  and  a  tax  on  individuals' or,  as  it  is  sometimes 
called,  a  personal  income  tax.'  In  England  it  would  make 
no  difference  whether  the  tax  were  assessed  to  the  indi- 
vidual security-holder  or  to  the  corporation.  But  in  the 
United  States  the  new  law  combined  what  during  the  early 
years  of  the  Civil  War  period  was  embraced  in  two  separate 
measures.  There  existed  at  that  time,  it  will  be  remembered, 
not  only  a  tax  on  corporate  dividends  and  interest,  but  also  a 
tax  on  certain  corporate  gross  receipts,  in  addition  to  the  tax 
on  individual  incomes.  The  corporations  were  permitted  to 
add  the  gross  receipts  tax  to  the  charges  made,  so  that  the 
tax  was  virtually  shifted  to  the  public.  In  the  case  of  the 
corporate  income  tax,  however,  the  corporations  were  not 
compelled  to  deduct  the  tax  from  the  dividends  or  interest  of 
each  security-holder,  and  as  a  matter  of  fact  they  generally 
assumed  the  tax  themselves  without  withholding  it  from  the 
bondholder.  It  became  to  that  extent  a  tax  on  the  corporation, 
not  on  the  bondholder.  Under  the  new  law  the  tax  was  also 
assessed  directly  on  the  corporation.  But,  as  we  have  seen 
above,  it  was  not  assessed  on  corporate  'bonds.  So  that  the 
question  of  withholding  the  tax  from  the  interest  due  would 
not  arise.  Yet  so  far  as  it  went,  it  was  a  corporation  tax  in 
addition  to  the  individual  income  tax. 

The  fifth  point  of  importance  is  the  §4000  exemption.  The 
merit  or  demerit  of  this  provision  will  be  discussed  below. 

IThe  latter  tfrm  ;!■.:!•;  ;v.!t  rfprf-unt  the  jfittitv.tii!!!  •.■.••!;  pfrfs-it  R::-.;r3:v,  be- 
cause under  the  American  law  curpurations  are  alsu  uunskkred  persons. 


5^6 


The  Income  Tax 


i  I 


I 


There  are,  however,  several  considerations  to  which  attention 
must  be  called  here.  In  one  sense  the  system  was  more  logical 
than  the  English  system.  In  England,  it  will  be  remembered, 
a  certain  small  amount  is  absolutely  exempted,  while  incomes 
up  to  a  higher  amount  are  permitted  certain  abatements  ;  and 
it  is  only  on  incomes  above  the  latter  figure  that  the  full  amount 
is  assessed.  In  the  American  income  tax  there  was  only  a 
single  exemption,  but  the  abatement  applied  to  all  incomes  of 
whatever  amount.  The  tax  was  levied  only  on  the  excess  of 
incomes  over  $4000.  This  is  a  provision  the  principle  of 
which  was  already  found  in  the  income  tax  acts  of  the  Civil 
War,  and  which  has  recently  been  adopted  in  some  of  the  Aus- 
tralasian income  taxes,  where  a  deduction  of  a  fixed  amount  is 
permitted  for  all  incomes.  But  while  it  is  entirely  logical,  it  is 
manifestly  unjust  to  permit  the  man  with  $4000  income  to  go 
entirely  free  and  to  impose  on  his  neighbor  who  has  perhaps 
$4010  income  a  tax  of  over  $80.  The  jump  is  too  sudden.  It 
will  be  perceived,  however,  that  the  American  system  virtually 
provided  for  a  slightly  graduated  tax  running  up  from  zero  to 
almost  two  per  cent  on  the  entire  income.  For  a  proportional 
tax  on  the  excess  over  a  certain  sum  necessarily  means  a 
graduated  tax  on  the  entire  amount. 

Again,  while  the  exemption  was  nominally  accorded  to  all 
incomes,  the  introduction  of  the  corporate  income  tax  practi- 
cally nullified  the  provision  in  one  respect.  Since  corpora- 
tions were  to  pay  upon  their  entire  net  profits  as  defined  by 
the  law,  it  is  manifest  that  persons  who  invested  their  whole 
property  in  corporate  stock  from  which  they  received  less 
than  54000  income,  would  nevertheless  have  the  tax  withheld 
from  their  dividends  by  the  corporation.  To  the  class  of 
small  investors  the  exemption  accorded  by  the  law  was,  there- 
fore, of  no  use  ;  for  no  machinery  was  provided  for  granting 
rebates  to  such  taxpayers,  as  is  the  case  in  some  other  coun- 
tries. The  same  inconsistency,  as  we  know,  occurred  in  the 
acts  during  the  Civil  War  and  was  noted  at  various  times. 
But  it  was  deemed  impracticable  to  remedy  the  injustice.  In 
the  case  of  official  salaries,  however,  where  the  tax  was  ad- 


1  'HIW1   i 


■•■v"^»^'J 


Tf^ 


•  ^.t'=.-'l:. 


.u.- 


xm 


The  Income  Tax  of  i8g4 


517 


vanced  by  the  government,  provision  was  made  for  the  exemp- 
tion. The  government  was  to  withhold  the  tax  only  in  case 
the  salary  exceeded  $4000. 

It  must  be  noticed  also  that  only  one  deduction  of  $4000 
was  permitted  from  the  aggregate  income  of  all  members  of 
any  family.  This  might  in  some  cases  render  the  exemption 
nugatory.  Under  the  recent  development  of  American  law 
the  property  interests  of  a  married  woman  are  often  entirely 
independent  of  those  of  the  husband.  Where  her  income  was 
less  than  $4000,  she  would  nevertheless  still  be  taxable  if 
her  husband's  income  exceeded  that  figure.  The  force  of  the 
objection  is  somewhat  weakened,  first  by  the  fact  that,  after 
all,  it  is  the  family  income  as  a  whole  which  serves  as  the 
best  test  of  ability  to  pay,  and  secondly  by  the  fact  that  it  is 
very  unlikely  that  married  women  would  have  been  assessed 
at  all,  even  though  the  letter  of  the  law  called  for  the  taxation 
of  "  all  persons  of  lawful  age." 

The  sixth  and  final  point  to  which  it  is  well  to  call  attention 
is  what  is  commonly  called  double  taxation.  The  law,  it  will 
be  remembered,  applied  not  only  to  all  citizens  resident,  but 
to  the  entire  income,  no  matter  where  received,  of  citizens 
residing  abroad  and  of  aliens  residing  in  the  United  States ; 
and  it  also  applied  to  so  much  of  the  income  of  non-resident 
aliens  as  was  derived  from  property  or  business  within  the 
United  States.  Here  some  interesting  questions  arise.  Even 
assuming  that  the  first  and  fourth  classes  would  be  reached,  it 
is  difficult  to  believe  that  the  second  and  third  classes  could 
be  touched.  It  might,  indeed,  be  possible  to  assess  the  income 
of  a  non-rerlvient  in  so  far  as  it  was  derived  from  tangible 
property  situu  e  in  this  country.  But  in  most  cases  it  would 
be  virtually  impossible  to  reach  the  non-resident.  Still  more 
difficult  would  have  been  the  task  of  hitting  the  entire  income 
of  foreigners  resident  in  this  country  in  so  far  as  their  income 
was  derived  from  foreign  sources ;  for  the  usual  means  of 
control  would  naturally  be  lacking. 

Even  assuming,  however,  that  the  practical  difficulties  were 
not  insuperable,  there  would  be  grave  objections  in  princijile. 


5i8 


The  Income  Tax 


!  I 


If  a  resident  foreigner  is  taxed  on  his  entire  income  here,  and 
is  again  taxed  on  his  income  at  home,  we  ha/e  manifestly 
double  taxation.  Or  if  a  non-resident  citizen  is  taxed  by  us 
on  his  entire  income,  and  is  then  again  taxed  abroad  in  the 
country  in  which  he  happens  to  reside,  we  have  a  not  less 
glaring  case  of  double  taxation.  Some  states,  like  Prussia, 
tax  foreigners  only  after  they  have  lived  more  than  a  year  in 
the  country,  except  when  their  income  is  derived  from  Prussian 
property  or  business.  The  law  of  1894  contained  no  such 
provision.  Again,  while  England  does  indeed  assess  resi- 
dent aliens,  it  does  not  attempt  to  reach  the  entire  income  of 
non-resident  citizens.  The  Civil  War  taxes  did  not  at  first 
even  tax  the  income  of  aliens;  but  later  they  did  try  to  reach 
the  entire  income  of  non-resident  citizens.  The  new  tax  fol- 
lowed the  mistaken  policy  of  the  later  laws.  But  the  practi- 
cal effect  of  the  provision  would  have  been  slight.  For  this 
part  of  the  law,  it  may  be  conjectured,  would  almost  inevitably 
have  remained  a  dead  letter. 


§  4.    The  Alleged  Shortcomings  of  the  Law 

What,  then,  are  we  to  think  of  this  measure.'  Was  it  a 
wise  innovation,  or  was  it  essentially  vicious  in  principle  and 
destined  to  be  ineffective  in  practice .'  We  can,  perhaps, 
best  approach  the  problem  by  discussing  some  of  the  objec- 
tior  3  that  were  raised  against  the  law. 

One  of  the  arguments  most  commonly  advanced  by  the 
opponents  of  the  measure  was  the  alleged  socialistic  charac- 
ter of  the  tax.  To  assess  people  upon  their  income  was  said 
to  savor  of  :,  )cialism.  The  more  violent  enemies  of  the 
measure  went  so  far  as  to  maintain  that  the  state  has  no 
right  to  confiscate  any  part  whatever  of  a  man's  earnings. 
This  objection,  indeed,  scarcely  deserves  a  refutation.  It 
entirely  misconceives  the  relation  of  the  individual  to  the 
state.  The  cry  of  "  socialism  "  has  always  been  the  last  ref- 
uge of  those  who  wish  to  clog  the  wheel  of  social  progress 
or  to  prevent  the  abolition  of  long-continued  abuses.     The 


The  Income  Tax  of  i8g4 


519 


factory  laws  were  in  their  time  dubbed  socialistic.  Com- 
pulsory education  and  the  post-office  system  were  called 
socialistic.  And  there  is  scarcely  a  single  tax  which  has  ever 
been  introduced  which  has  not  somewhere  or  other  met  with 
the  same  objection.  Only  a  short  time  ago  the  new  inheri- 
tance ta.xes  were  vehemently  opposed  in  some  of  the  Ameri- 
can commonwealths,  as  was  the  new  estate  duty  in  England, 
on  the  ground  of  socialism.  The  same  fate  befell  the 
property  tax  before  its  recent  introduction  in  Holland  and 
Germany.  As  a  matter  of  fact,  if  there  is  any  socialism  at 
all  to  be  discovered  in  these  measures,  it  would  be  far  more 
obvious  in  the  property  tax,  which  entirely  exempts  all  earn- 
ings of  the  lower  classes  in  so  far  as  they  are  again  expended, 
than  in  the  income  ta.x,  which  reaches  earnings  from  other 
sources  than  mere  property.  The  property  tax  hits  only  the 
property  owner ;  the  income  tax,  as  such,  hits  the  income 
receiver,  whether  the  income  be  derived  from  property  or 
not.  Yet  we  have  become  so  accustomed  to  the  property 
tax  that  the  idea  of  its  being  socialistic  seems  ridiculous.  Nor 
are  we  speaking  here  of  the  e.xemption  feature  of  the  income 
tax  law,  which  will  be  discussed  below.  The  cry  of  social- 
ism was  rai:ed  against  the  income  tax /<r  sc,  while  the  high 
e.xemption  only  served  as  an  additional  count  against  it. 

Had  the  principle  of  progressive  taxation  been  introduced, 
some  color  might  have  been  lent  to  the  charge  of  socialism. 
The  Populists,  it  will  be  remembered,  introduced  several 
amendments  looking  toward  graduation,  but  they  were  all  de- 
feated. As  a  matter  of  fact,  however,  recent  investigations 
have  shown  that  progressive  taxation,  which  to  some  seems 
the  very  quintes.sence  of  .socialism,  and  which  has  undoubtedly 
often  been  urged  for  socialistic  reasons,  is  perfectly  defensible 
in  theory  on  purely  economic  and  fiscal  grounds  '  although, 
for  other  reasons,  its  application  to  the  income  tax  is  practi- 
cally inexpedient.^  It  must  be  remembered,  moreover,  that 
the  income  taxes  of  the  Civil  War  period  were  levied  on  the 
progressive  principle,  and  were  defended  on  purely  economic 

'  Cf.  supra,  pp.  3 1 -.14.  '•'  C/.  infra,  Cr.iclusion,  §  3. 


m^ist 


520 


The  Income  Tax 


grounds  both  by  the  administration  and  by  the  legislators. 
Kngland  has  not  hesitated  to  introduce,  within  th  last  few 
years,  a  progressive  income  tax,  and  the  great  extension 
recently  given  to  the  progressive  principle  in  countries  like 
Holland,  Switzerland,  Germany,  and  Australia,  shows  that 
the  legislators  are  not  blinded  by  mere  words.  As  it  was, 
Congress  did  not  attempt  any  graduation  of  the  income  tax, 
except  in  so  far  as  the  $4000  exemption  provided  for  a  sort 
of  restricted  progression.     The  cry  of  socialism  had  no  effect. 

A  still  weaker  objection  was  the  alleged  un-American  and 
undemocratic  nature  of  the  tax.  The  tax  was  represented  as 
peculiar  to  monarchic  governments  and  the  effete  civilization 
of  the  old  world.  Senator  Hill  roundly  asserted  that  the 
income  tax  was  unknown  in  democratic  communities.'  But 
even  if  it  be  conceded  that  luigiand  is  the  home  of  hide-bound 
medixv.ilism,  it  is  hard  to  include  the  cantons  of  Switzerland 
or  the  colonies  of  Australasia  in  any  such  category.  No  one 
acquainted  with  the  facts  need  be  told  that  the  income  tax 
has  been  most  fully  developed  precisely  in  the  most  demo- 
cratic communities,  and  that  the  whole  tendency  toward 
deriiocracy,  even  in  non-republican  states,  has  gone  hand  in 
hand  with  the  extension  of  direct  taxation,  and  more  especially 
of  the  income  tax.  Had  this  absurd  objection  not  been  so 
widely  quoted  and  copied,  it  would  not  deserve  mention  here. 

While  the  above  objections  to  the  income  tax  law  are  not  of 
a  very  serious  character,  there  was  perhaps  a  deeper  founda- 
tion for  the  charge  that  the  nv  asure  was  an  expression  of 
sectional  animosity.  The  exemption  of  $4000  incomes  prac- 
tically meant  that  the  Western  and  Southern  states  would 
gain  at  the  expense  of  the  industrial  centres  in  the  Mast  and 
North.  In  many  of  those  states  individual  incomes  above  the 
exemption  point  were  comparatively  few.  And  it  is  undoubt- 
edly a  fact  chat  the  enthusiasm  for  the  tax  came  chiefly  from 
those  who  were  thus  assured  freedom  from  its  burdens.  Hut  it 
must  not  be  forgotten  that  there  was  much  provocation.  The 
Southern  states  had  for  years  been  compelled  to  bear  the  bur- 

•  tj.  alsu  his  denunciation  of  the  "foreign  professors,"  supra,  p.  503. 


The  Income  Tax  of  jSg^ 


521 


dens  of  the  tariff,  th(  procxfds  of  which  went  in  great  part  to 
the  pensioners  of  the  North.  It  is  but  natural  that  whi  n  an 
opportunity  came,  the  tables  should  be  turned.  Again,  as  we 
have  already  seen,  the  \\  estcrn  states  felt  that  they  were  beini; 
unjustly  treated  by  a  national  revenue  system,  of  which  they 
felt  the  incubus,  but  the  advantages  of  which  were  not  so  plain. 
Tt  them  also  the  income  tax  seemed  a  piece  of  retributive 
justice.  So  that  the  sectional  animus,  which  was  no  doubt 
present  to  some  degree,  despite  Wilson's  statement  to  the 
contrary,'  may  be  explained  and  even  partly  excused.  The 
sectional  feeling  itself,  however,  was  considerably  exagger- 
ated. For  the  chief  explanation  of  the  income  tax  is  not 
so  much  geographical  as  economic  in  character.  It  was 
not  so  much  a  movement  of  the  South  and  West  against 
the  North  and  Mast,  as  of  the  agricultural  class  against  the 
industrial  and  moneyed  ( '  iss.  It  is  simply  an  accident  that 
the  l!ast  is  the  home  of  the  moneyed  interest,  while  the  West 
and  South  are  the  home  of  the  landed  interest.  If  any  class 
antagonisms  are  discernible,  they  were  ;)rimarily  economic  and 
only  incidentally  sectional. 

The  fourth  aiul  final  objection  that  was  preferred  was  the 
old  but  ever  new  contention  that  ti.o  income  tax,  however  wise 
in  theory,  works  badly  in  practice.  That  there  is  consider- 
able truth  in  this  is  not  to  be  denied.  Hut  it  is  usually  for- 
gotten that  in  dealing  with  problems  of  this  character  the  real 
inquiry  is  not  what  is  absuUitely  good,  but  what  is  relatively 
best.  So  far  as  the  objection  is  true,  it  will  be  found  to  be 
due  in  great  part  to  certain  provisions  of  the  law  which,  as 
wc  shall  see,  might  have  been  avoided.  But  of  the  objection 
itself  too  much  has  been  made. 

We  have  seen  abo\ .  ^  that  the  Civil  War  income  tax,  at 
first,  at  least,  worked  more  satisf,  corily  than  the  contempo- 
raneous local  property  taxes.  Ani  our  study  of  the  situation 
in  England  and  Germany  has  [  roved  that  an  income  tax  does 
not  neces.sarily  work  badly  in  |ir  "  tice.  It  depends  entirely 
upon  the  m.anner  in  which  the  tax  is  ad  linistcrod. 

'  Supra,  p.  501.  ^  Sitfrcr,  pp.  473-5. 


5" 


Tlie  Income  Tax 


It  appears  from  the  above  review  that  most  of  the  objec- 
tions urged  aj,'ainst  the  income  tax  either  entirely  lacked  foun- 
dation or  were  the  result^  of  considerable  exaggeration.  To 
those  acquainted  with  the  history  of  the  Knijlish  income  tax, 
the  objections  will  seem  quite  familiar.  Similar  points  were 
nade  year  after  year,  and  often  in  almost  the  same  language  ; 
but  the  tax,  nevertheless,  commended  itself  to  the  people  as 
a  whole,  and  it  has  persisted  and  developed.  So  also  it  is 
possible  that  the  new  tax,  espucia'ly  in  the  gicat  industrial 
centres,  would  have  succeeded  better  than  the  present  tax  on 
intangible  personalty.  Imperfect  as  it  unc'u-ibtedly  was,  the 
income  tax  might  have  proved  to  be  a  relative  good,  and  to 
have  constituted  a  considerable  improvement  over  the  existing 
system. 

§  5.    The  Real  Defects  of  the  Law 

After  all  has  been  said,  however,  it  remains  true  that  too 
much  could  not  be  hoped  from  the  practical  working  of  the 
income  tax.  A  system  which  rests  on  a  method  of  .elf- 
assessment  manifestly  opens  wide  the  door  u  fraud  and 
evasion.  The  provisions  for  supplementary  revision  of  the 
returns  in  certain  cases  by  official  assessments  were  far  from 
adequate.  The  methods  of  checking  the  returns  by  uUlizing 
the  probate  courts  and  theinventories  of  property  after  death, 
which  are  customary  in  Germany  and  even  in  democratic 
Switzerland,  would  not  be  possible  as  yet  in  America.  And 
although  much  of  the  inquisitorial  character  of  the  former 
income  tax  had  been  removed  by  the  stringent  provisions  in 
the  new  law  calculated  to  insure  secrecy,  there  can  be  very 
little  doubt  that  the  effort  to  secure  correct  returns  of  indi- 
vidual incomes  would  have  been  far  from  successful.  Above 
all,  there  were  certain  grave  defects  in  the  new  law,  whicii, 
in  contrast  to  the  more  or  less  imaginary  or  highly  exag- 
gerated objections  adverted  to  above,  are  deserving  of  serious 
consideration. 

In  the  first  place,  all  incomes  were  treated  alike.     There 
was,  technically  speaking,  no  differentiation.     The  tendency 


The  Income   Tax  of  i8g4 


523 


of  modern  income  taxation,  as  we  know,  is  to  charge  pre- 
carious or  earned  incomes  at  a  lower  rate  than  permanent  or 
unearned  incomes.  The  new  national  tax  made  no  such 
distinction.  It  may  be  said  in  reply  that  the  distinction, 
although  not  in  express  terms,  was  nevertheless  virtually 
provided  for.  For  the  very  existence  of  the  property  tax  in 
the  United  '^'^atcs  implies  the  non-taxation  of  labor.  If  all 
men  are  f  ''.e  on  tKeir  income,  and  if  an  additional  tax 

is  imp'  i  •  prope*-'  the  income  from  property  is  natu- 
rally t  1  ,  ■  ..■  •  ■'■  ;.  u  income  from  labor  This  was 
in  f?.     I  t    .  :      .1'  ',1      for  the  introduction  of  the  sup- 

ple ,  I  'russia  and  Holland.     Kut  the 

fo'  I.  1  nened  in  America  by  the  fact 

t*^        'K  '      \  I   ;i!i'.i    .s  the  greater  the  property,  or  at 

a         I.;,'-  )U(  nil...  ;  .   perty,  the  less  docs  it   pay.     It 

migh    I     .  ■:■■,■.  vi   ..ended  that  the  S4000  exemption 

freed  laL'  1  ^  1  "n..,  ^1  m!  taxation.  This  argument  is  good 
as  far  as  :■  -  Km  mder  modern  conditions  there  are 
many  labor  .ncomes  which  exceed  that  figure,  sucli  as  the 
incomes  of  the  professional  classes  and  of  officials  of  large 
corporations.  The  injustice  of  assessing  them  at  the  same 
rate  as  the  recipients  of  permanent  incomes  is  not  removed 
by  making  the  14000  exemption  applicable  to  both.  The 
modem  theory  as  well  as  the  modern  practice  is  to  pay 
attention  not  only  to  the  income  itself,  but  to  the  source  from 
which  thj  inc  ne  is  derived.  The  failure  of  the  new  law 
to  obs'rve  this  distinction  constituted  an  undeniable  defect. 

The  second  objection  is  one  to  which  attention  has  already 
been  called  in  another  connectic  v  vW  the  $4000  exemption. 
It  is  perfectly  true  that  what  is  .  nwn  as  the  exemption  of 
the  minimum  of  subsistence  has  „.,come  a  cardinal  demand 
in  the  theory  i  f  taxation.  It  is  one  thing,  however,  to  recog- 
nize  the  justic  of  the  principle  in  the  abstract,  and  quite 
another  thing  to  defend  the  particular  shape  given  to  it  by 
the  new  law.  He  would  be  bold  indeed  who  would  say  that 
a  $4000  income  constitutes  a  minimum  of  subsistence.  When 
capitalized  at  the  current  ra'c^  of  interest,  it  is  equivalent  to 


k 


524 


The  Income  Tax 


\ 
I-- 

i 


I    I- 


property  of  from  $80,000  to  over  Si 00,000.  This  is  not  a 
minimum,  but  a  very  comfortable  subsistence.  Under  our 
former  income-tax  laws,  when  the  exemption  was  $600,  the 
total  number  of  taxpayers  in  1866  was  460,170,  With  an 
exemption  raised  to  $(ooo,  the  number  was  reduced  in  1867 
to  240,134.  When  the  exemption  was  finally  reduced  to 
1^2000,  the  total  number  of  taxpayers  in  1872  was  only  72,949. 
Even  making  allowance  for  the  increase  of  wealth  and  popu- 
lation during  the  last  quarter  of  a  century,  it  is  manifest  that 
the  number  of  individual  taxpayers  under  the  new  law  would 
have  been  exceedingly  small.  Regarded  from  the  standpoint 
of  revenue.  Congress  therefore  voluntarily  abandoned  a  rich 
source. 

It  must  indeed  not  be  forgotten  that  we  should  look  at  the 
income  tax  as  a  branch  of  the  whole  revenue  system.  Much 
may  accordingly  be  said  in  mitigation  of  this  seeming  injus- 
tice. As  we  pointed  out  .nbove,  the  burden  of  taxation  —  that 
is,  of  the  tariff  and  the  local  property  tax  —  is  borne  primarily 
by  the  lower  middle  class,  more  especially  by  the  farmers. 
Even  though  $4000  be  not  a  minimum  of  subsistence,  it 
nevertheless  represents  in  large  part  the  income  of  a  class 
which  is  on  the  whole  unfairly  treated  at  present.  Moreover, 
in  England  the  limit  of  abatement  has  recently  been  raised 
to  ;^700,  which,  in  view  of  the  different  purchasing  power  of 
money,  is  really  higher  than  the  proposed  American  limit. 
Nevertheless,  it  is  probably  true  that  the  limit  was  fixed  too 
high :  for  even  under  the  property  tax  people  who  earn 
and  spend  their  own  incomes  are  entirely  exempt.  In  addi- 
tion, a  definite  amount  of  [)roperty  over  and  above  the  annual 
earnings  is  also  exempt,  so  that  'he  law  of  1894  granted  still 
another  exemption.  While,  therefore,  something  may  be  said 
in  explanation,  and  even  in  palliation,  of  the  provision,  we 
are  forced  to  the  conclusion  that  the  S4000  exemption  was 
too  high.  Had  the  law  been  enforced,  it  would  in  all  proba- 
bility have  seriously  inteiferetl  not  only  with  the  fiscal  success 
of  the  measure,  but  also  with  the  popularity  of  the  tax  among 
those  who  would  surely  have  thought  that  they  were  being 


Tlie  Income  Tax  of  iSg^ 


525 


unduly  burdened  in  order  to  free  an  entire  cla^o  that  was  wcl! 
able  to  contribute  something. 

The  third  objection  is  one  to  which  we  have  already  alluded, 
—  the  incorporation  of  .in  inheritance  tax  into  the  income  tax 
law.  It  was  discussed  above  rather  from  the  point  of  view  of 
the  theory  of  income.  To  say,  however,  that  the  inclusion 
of  inheritances  is  unscientific  does  not  settle  the  question 
whether  it  was  correct  to  tax  inheritances  as  such.  It  is, 
after  all,  immaterial  whether  the  law  provides  for  a  separate 
inheritance  tax  or  whether  it  is  made  a  part  ot  a  nominal 
income  tax.  The  real  question  is :  Was  it  wise  to  impose  an 
inheritance  tax  at  all .' 

To  answer  this  query,  it  is  necessary  to  consider  the  rela- 
tions between  federal  and  state  ta.\es.  From  the  very  ori<;iii 
of  our  government  it  has  been  the  practice  to  make  a  differ- 
ence between  the  two  and  to  apportion  to  each  government 
certain  sources  of  revenue  upon  which  the  other  should  not 
encroach.^  This  principle  has  been  violated  only  in  some 
periods  of  extraordinary  emergency,  or  at  other  times  in 
some  minor  legislation,  as,  for  instance,  in  the  case  of  tlio 
whiskey  taxes  in  Delaware  ind  Kentucky  which  conflict  wit'i 
the  national  internal  revenue  system,  liut  the  introduction 
of  the  inheritance  tax,  even  in  the  modified  form  of  a  tax- 
on  successions  to  personal  property  only,  is  a  serious  break 
with  this  principle  of  differentiation  or  segregation  of  source. 
One  of  the  chief  steps  in  tl,e  re''c  rm  of  American  finance  has 
been  the  growth  of  the  inherit.' 1  ce  tax  as  a  commonwealth 
tax  and  its  development,  t(getli  t  with  the  corporation  tax, 
as  a  main,  or  in  some  cases  ali:-ost  an  exclusive,  source  of 
commonwealth  revenue,  thus  permitting  the  other  sources  of 
revenue  to  be  relegated  to  the  local  divisions.  The  imposi- 
t'on  of  a  federal  inheritance  tax,  while  perfectly  justifiable 
in  itself,  would  tend  to  check  this  salutary  development.     It 


'  We  are  only  just  "aUint*  up  t  ■  llu'  fail  that  the  same  salutary  principle  can 
anil  iiuylit  til  be  applicil  to  ihc  .•.l.itc  an  i  li.  x\  ^{..vcrrmuiUs.  Tlir  wli.ilc  li-ndency 
of  recent  ta^t  ri'forin  in  thi'  I'liitnl  Stairs,  a^  alif^al,  ii  to  oliserve  the  itistimtion 
between  the  lources  of  state  and  I'cal  revenue. 


526 


The  Income  Tax 


would  supply  the  commonwealths  with  a  reason  for  not  adopt- 
ing the  inheritance  tax  as  a  source  of  state  revenue,  and  it 
would  render  far  more  difficult  a  rounding  out  and  logical  ar- 
rangement of  the  entire  tax  system.  It  may  be  said  that  just 
as  an  income  tax  is  far  better  as  a  national  than  as  a  state 
tax,  because  so  many  complicated  questions  of  domicile  and 
double  taxation  are  avoided,  so  in  the  same  way,  and  largely 
for  the  same  reasons,  a  federal  inheritance  tax  is  preferable 
to  a  state  inheritance  tax.  But  even  if  this  be  tr ae,  the  ad- 
vantage is  dearly  purchased  at  the  cost  of  an  entire  reversal 
in  the  march  of  progress  towards  a  consistent  and  logical 
revenue  system  for  the  entire  country.  It  may  be  possible  to 
find  some  method  of  filling  the  gap  created  in  the  common- 
wealth tax  system.  But  it  seems  a  pity,  to  say  the  least,  to 
check  a  promising  movement  when  the  difficulty  of  making 
any  changes  at  all  are  so  great  as  in  the  local  tax  systems  of 
the  United  States  at  present.^ 

But  all  these  objections  to  the  income  tax  sink  into  insig- 
nificance when  compared  with  the  fourth  defect.  This  is  the 
failure  to  introduce  the  principle  of  stoppage  at  source. 

In  the  new  law  we  find  only  two  attempts  to  apply  the 
principle.  Corporations  were  to  deduct  the  tax  from  divi- 
dends, and  the  government  was  to  deduct  the  tax  from  the 
salaries  of  public  officials.  Apart  from  this,  however,  the 
new  tax  substantially  followed  the  lump-sum  idea.  Yet  it 
would  have  been  comparatively  simple  to  divide  the  tax 
into  schedules  with  the  stoppage-at-source  principle.  For 
instance,  the  tax  on  income  from  real  estate  might  have  been 
assessed  primarily  on  the  occupant,  and  deducted  from  the 
rental  paid  to  the  owner.  The  tax  on  the  income  from 
mortgages  might  have  been  levied  by  treating  the  income  of 
the  mortgagee  as  a  part  of  real  estate,  and  assessing  it  pri- 
marily on  the  mortgagor,  with  pn>visions  for  withholding  the 
interest  by  the  mortgagor,  and  prohibiting  contracts  to  the 
contrary  by  the  mortgagee,  as  is  the  practice  in  some  of 
the  states  to  day.  The  tax  on  salaries  niii^ht  have  been 
'  Kur  a  further  trcatmenl  uf  this  ijucstion,  ./.  injm,  t\>ni.imii.'»,  j  2. 


The  Income  Tax  of  iSg4 


527 


reported  and  withheld  by  the  employer.  The  interest  on 
corporate  bonds  might  have  been  withheld  by  the  corporation. 
And  in  many  other  Wc.ys  the  principle  of  stoppage  at  source 
might  have  been  introduced. 

Instead  of  this,  the  American  legislators  chose  to  follow 
the  more  primitive  and  discredited  methods.  The  result 
would  inevitably  have  been  an  immense  amount  of  evasion 
and  undervaluation.  With  no  machinery  for  checking  the 
returns,  and  with  no  reliable  estimates  for  gauging  the  value 
of  the  self-assessments,  it  is  unfortunately  only  too  probable 
that  many  of  the  doleful  predictions  made  by  the  opponents 
of  the  measure  would  have  been  verified.  It  may  not  indeed 
have  been  true  of  the  new  tax  on  individual  incomes,  as  it 
has  been  said  of  the  state  tax  on  pergonal  property,  that  it  is 
looked  on  even  by  honorable  citizens  very  much  in  the  light 
of  a  Sunday-school  donation ;  but  it  can  safely  be  asserted 
that  the  ta.x  on  individual  incomes  would  have  yielded 
exceedingly  little  as  compared  with  those  two  features  of 
the  law  in  which  the  stoppage-at-source  idea  was  introduced, 
namely,  the  tax  on  public  salaries  and  that  on  corporate 
dividends.  It  is  very  much  to  be  regretted  that  Congress 
should  have  deliberately  refrained  from  adopting  those  meas- 
ures which  alone  would  have  made  the  tax  both  lucrative 
and  comparatively  efficient.  The  difficulties  were  needlessly 
multiolied ;  the  lessons  of  experience  went  unheeded ;  and 
the  income  tax  itself  would  have  been  held  responsible  for 
what  is  really  not  the  use  but  the  abuse  of  the  principle. 

A  fifth  and  final  defect  in  the  income  tax  law  was  the 
carelessness  with  which  it  was  drawn,  and  the  lack  of 
coordination  between  its  various  parts.  Vov  instance,  section 
28  deducts  from  taxable  income  "that  portion  of  any  salary 
upon  which  the  fmf'i\vcr  is  required  by  law  to  withhold,  and 
does  withhold  the  tax,  and  pavs  the  same."  Vet  section  33 
states  that  "  every  corporation  which  pays  to  an  employe  a 
salary  or  compensation  exceeding  54,000  per  annum,  shall 
.report  the  same  to  the  collector  or  deputy  collector  of  his 
district,  and  said  empioye  [not  employerj  shall  pay  thereon," 


% 


-.28 


The  Income  Tax 


»/ 


lill 


etc.  Of  course  the  explanation  is  that  in  the  original  draft 
the  word  "employe"  read  "employer";  but  when  the  law 
was  enacted,  the  amendment  applied  only  to  one  of  the  two 
clauses,  the  other  being  allowed  to  stand,  with  the  absurd 
result  as  stated. 

Other  incongruities  were  pointed  out  .several  months  after 
the  enactment  of  the  law  in  a  speech  by  Senator  Hill  on 
January  ii,  1895,  in  which  he  objected  to  the  regulations 
that  had  in  the  meantime  been  issued  by  the  commissioner 
of  internal  revenue.^  He  maintained  that  section  27  was  so 
unclear  as  to  be  unworkable.  He  pointed  out  further  that 
under  section  28  the  ta.vpayers'  return  of  income  must  be 
made  before  March  i,  and  yet  that  under  section  32  the  tax 
on  the  profits  of  corporations  was  not  payable  until  July  i. 
"  How  then  can  it  be  possible  for  an  individual  to  swear  in 
the  preceding  March  that  the  corporation  has  paid  the  income 
tax  in  the  following  July .'  The  law  requires  of  the  citizens 
an  impossibility.  "2  He  also  called  attention  to  the  words 
"premiums  on  bonds,  notes  and  coupons."  What  that  meant 
no  one  knows.  As  Senator  Hill  stated,  "The  draftsman 
has  imparted  into  these  days  of  parity  of  all  our  dollars,  the 
lingo  of  the  days  of  impahily."  .  Finally,  he  commented  on 
several  other  glaring  inconsistencies  like  that  between  sec- 
tions 32  and  36. 

While  the  law  was  still  being  discussed.  Senator  Piatt,  of 
Connecticut,  said  :  "  I  have  been  given  several  severe  head- 
aches in  tryini,^  to  read  the  provisions  which  relate  to  the 
income  tax  and  understand  them  with  the  amendments  that 
have  been  passed."  ^  The  situation,  however,  was  well 
summed  up  by  Senator  Hill:  "I  think  I  understand  how  it 
has  come  to  pass  that  the  sections  of  this  income  tax  law  are 
so  conflicting  and  unworkable.  When  the  measure  was 
framed   in    the   other   House   it  was  filled  with    passionate 


'  l'hiss|rich  wa-i  ri|irintt:cl  in  The  Incomi  lax  l.a-.L<  and  Treasury  Kegula- 
twin  reUitr.i  /,'  i/i  i.',ilr<!u>n,  together  with  the  Speech  Jelivered in  Elucidation  of 
the  Same.     Hy  SinaL.r  Daviil  1!.  Hill,  New  York,  n,  .1.  r'^95]- 

^  Of.  cit.,  p.  57.  '  Congresiional  Ktcord,  1894,  vol.  26,  p.  6577. 


The  Income  Tax  of  ifU)^ 


529 


resentment  against  Eastern  jipita!  Tt  was  so  unreasonable 
that  many  of  its  worst  feature-  were  'Xpunged  by  the  Senate, 
but  when  one  section  after  anorhe*-  he>^!  been  modified  those 
in  the  Senate  standing  sponsors  ,■'  the  Pleasure  had  not  the 
time  or  opportunity  or  disi>osition  to  taki-  ij.  the  bill  as  it 
was  finally  amended,  and  put  order  ^  w 
therein.  When  it  went  back  to  the  H  us. 
concentrated  on  the  tariff  portion.  Hu'  ii- 
House  examined  the  income-tax  abortion  they 
have  put  harmony  into  its  warring  sections  ; 
had  been  done  the  whole  bill  was  swallowed  in  .1  . 
That  there  is  much  truth  in  this  staten;-  nt  ;^  , 
It  is  a  sad  reflection  that  a  measure  which,  as  \vc  ki,  >■  rook 
in  France  more  than  two  years  to  discuss  iii  ti  charii*^^  of 
deputies  alone,  should  liave  been  debated  in  h.-  ['],*.  ;d 
States  for  three  hours  in  the  House,  and  for  puis  .t  fi\, 
days  in  the  Senate.  Had  the  result  been  anythini^  e,  !)u! 
what  Senator  Hill  termed  an  "abortion"  of  an  incume  lax. 
it  would  have  been  surprising. 


IS  coherence 
motion  was 
■ '  is  in  the 

>wf'  probably 
f.*rfore  that 
.r..p.-l 

^   .deniable. 


ill 


?ff 


t 


§  6.    Conclusion 

From  the  above  review  it  is  evident  that  the  art  of  1S94 
fell  considerably  short  of  being  a  jierfect  measure.  The  en- 
thusiastic hopes  of  its  admirers  vsero  bound  to  fail  of  realiza- 
tion. When  the  time  came  for  the  enforcement  of  the  law, 
comprehensive  preparations  were  made  bv  the  commis.sioner 
of  internal  revenue,  and  offices  for  the  collection  of  the  ta.v 
were  opened  in  the  ])rincipnl  'lies.  Hut  scarce! \  had  the 
declarations  of  income  begun  to  he  mule  when  the  tax  was 
attacked  as  unconstitutional,  and  within  a  short  time  it  was 
declared  invalid  by  the  Supreme  Court.  Tlu-  grounds  upoti 
which  this  decision  rested  will  he  exaniimd  in  the  following 
chapter.  Hut  it  m.iy  be  stated  here  that  whatever  be  our 
opinions  as  to  tiie  correctness  of  the  decision,  it  nnst  be  de- 
clared, on  the  whole,  not  entirelv  unfortunate  that  the  law 
'  Hill,  (>/.  <»'/..  pp.  59-O0. 

2M 


530 


The  Income  Tax 


was  overturned.  So  glaring  were  its  shortcomings  of  princi- 
ple, and  so  defective  were  some  of  its  administrative  provi- 
sions, that  it  is  safe  to  say  it  would  have  been  to  a  very 
large  extent  unworkable,  and  would  in  all  probability  have 
produced  more  lawsuits  than  revenue.  Many  who  believed 
at  (he  time  in  the  principle  of  an  income  tax  were  keenly 
disappointed  that  the  experiment  was  now  to  be  made  with 
so  imperfect  and  partial  an  application  of  the  principle. 
Even  from  their  point  of  view,  therefore,  the  decision  of  the 
Supreme  Court  was  not  entirely  to  be  deprecated. 

Whether  the  decision,  however,  was  correct  in  itself  is  a 
different  matter.  It  is  to  this  question  that  we  shall  now 
address  ourselves. 


CHAPTER  V 
The  Constitutionality  of  the  Income  Tax 

§  I.    General  Considerations 

The  constitutionality  of  the  income  tax  depends  upon  the 
interpretation  given  to  certain  clauses  in  the  federal  consti- 
tution. The  constitutional  provisions  in  respect  to  federal 
taxation  are  four  in  number :  — 

(i)  "Representatives  and  direct  taxes  shall  be  apportioned 
among  the  several  States  which  may  be  included  within  this 
Union,  according  to  their  respective  numbers,  which  shall  be 
determined  by  adding  to  the  whole  number  of  free  persons, 
including  those  bound  to  service  for  a  term  of  years,  and  ex- 
cluding Indians  not  taxed,  three-fifths  of  all  other  persons."  ' 

(2)  "Congress  shall  have  power  to  lay  and  collect  taxes, 
duties,  imposts  and  excises,  to  pay  the  debts  and  provide  for 
the  common  defense  and  general  welfare  of  the  United  States; 
but  all  duties,  imposts  and  excises  shall  be  uniform  through- 
out the  United  States.'"'* 

(3)  "  No  capitation,  or  other  direct,  tax  shall  be  laid,  unless 
in  proportion  to  the  census  or  enumeration  hereinbefore 
directed  to  be  taken."  ^ 

(4)  "No  tax  or  duty  shall  be  laid  on  articles  exported 
from  any  state."  * 

The  two  questions  that  arise  are  these :  First,  is  the  income 
tax  a  direct  tax  within  the  meaning  of  the  constitution  ?  If 
so,  it  must  be  apportioned  in  the  manner  prescribed,  and  that 
method  of  apportionment  would,  as  we  shall  see  later,  result 

'  .Article  i,  sec.  2,  clause  t,.  I'liis  clause  of  the  cnnstitutioii  hai!  been  modi- 
tied  by  the  fourteenth  amendment,  so  that  the  whole  number  of  persons  in  each 
state,  excluding  Indians  not  taxed,  is  to  lie  counted. 

-  Article  l,  sec.  S,  clause  I.  ^  .Article  l,  sec.  9,  clause  4. 

*  Article  I,  sec.  9,  clause  5. 

53' 


ii 


532 


The  Income  Tax 


^ 


'!# 


J 


in  such  crass  inequality  as  between  individuals  in  different 
parts  of  the  country  enjoying  the  same  amount  of  income,  as 
virtually  to  make  the  tax  impossible.  If  the  tax  is  a  direct 
tax  within  the  meaning  of  the  constitution,  it  is  safe  to  say 
that  practically  it  cannot  be  levied. 

Secondly,  if  the  tax  is  not  a  direct  tax,  but  a  duty,  impost, 
or  excise,  it  must,  according  to  the  constitution,  be  uniform. 
Does  the  uniformity  prescribed  by  the  constitution  preclude 
cither  a  progressive  or  a  differential  rate,  or  an  exemption  of 
the  minimum  of  subsistence .'  If  so,  an  income  tax  of  a  mod- 
ern kind  would  again  be  impossible. 

Let  us  take  up  first  the  question  of  uniformity,  as  one  that 
has  now  been  definitely  settled.  In  the  income  tax  cases  of 
1895  the  distinguished  counsel  for  the  taxpayers,  Messrs. 
Choate,  Seward  and  Guthrie,  advanced  a  vigorous  argument 
that  even  if  the  income  tax  was  not  a  direct  tax  under  the 
terms  of  the  constitution,  it  was  void  as  being  wanting  in 
u'liformity,  because  of  the  $4000  exemption,  and  because  of 
the  discriminating  treatment  of  corporations  as  compared 
with  individuals.  In  fact,  it  may  be  stated  that  in  mere  bulk 
of  argument  more  attention  was  paid  by  the  counsel  to  the 
question  of  the  uniformity  than  of  the  directness  of  the  tax. 
The  government  claimed,  on  the  contrary,  that  by  uniformity 
in  the  constitution  is  meant  only  geographical  uniformity, 
and  presented  a  great  array  of  arguments  and  documents  to 
substantiate  its  position.  As  it  happened,  the  court  in  its 
decision  did  not  touch  upon  this  point,  save  to  intimate 
that  it  was  equally  divided,  and  found  a  discussion  of  the 
other  j)i)int  quite  sufficient  for  its  purposes.  In  a  later 
case,  hinvevcr,  where  a  similar  question  came  up,  as  applied 
to  the  inheritance  tax,  and  where  one  of  the  same  counsel, 
Mr.  Guthrie,  repeated  virtually  the  identical  argument  that 
had  been  made  in  the  income-tax  case,  the  court  upheld  in 
its  entirety  the  contention  of  the  government  that  the  uni- 
formity predicated  in  the  constitution  denotes  only  geograph- 
ical  uniformity.'     H,  therefore,  the   income  tax  is  constitu- 

'  Knowlton  Ti,  Moore,  17S  U.S.,  45. 


The  Constitutionality  of  the  Income  Tax     533 


tional  in  other  respects,  it  is  not  rendered  unconstitutional  by 
the  mere  fact  that  it  exempts  a  certain  minimum  of  subsist- 
ence, or  that  it  applies  the  principle  either  of  differentiation 
or  of  progression.' 

The  question  cf  constitutionality  thus  narrows  itself  down 
to  the  problem  as  to  whether  the  income  tax  is  a  direct  tax.' 
The  question,  moreover,  is  not  an  economic  but  a  legal  one ; 
or  rather,  it  is  a  question  not  as  to  what  economists  understand 
by  the  words  "  direct  tax,"  but  what  the  words  mean  as  used  in 
the  constitution.  That  there  may  be  a  discrepancy  between 
these  conceptions  is  clearly  shown  by  the  decisions  of  the 
Supreme  Court.  Thus,  at  various  times,  taxes  which  are 
everywhere  conceded  by  economic  writers  to  be  compr"  .ed 
within  the  category  of  direct  taxes  have  been  held  not  to 
be  direct  taxes  in  the  purview  of  the  constitution.  As  early 
as  the  end  of  the  eighteenth  century  a  federal  tax  on  car 
riages  was  held  not  to  be  a  direct  tax,"  although  to-day,  in 
local  and  state  taxation,  a  tax  on  carriages  is  deemed  to  be 
quite  as  much  a  direct  tax  as  a  tax  on  any  other  form  of 
personal  property.  Again,  and  more  recently,  a  federal  tax 
on  the  earnings  of  corporations  was  decided  not  to  be  a  direct 
tax,  although  it  would  everywhere  be  conceded  by  economists 
that  such  a  corporation  tax  is  direct  in  the  ordinary  sense 
of  the  term.  Furthermore,  an  inheritance  tax,  which  econo- 
mists would  ordinarily  class  as  a  direct  tax,  has  been  held 
by  the  Supreme  Court  not  to  fall  within  that  category.  We 
must  hence,  at  the  outset,  be  careful  to  distinguish  between 
the  economic  and  the  constitutional  or  administrative  nomen- 
clature. This  is  true  not  alone  of  the  United  States,  but  of 
other  countries ;    and   in  addition,  what  is   legally  called   a 


n 


If 


VI 


'  The  court  indeed  leaves  it  as  an  open  question  whether  there  might  not  lie 
such  an  extreme  (graduation  of  the  tax  as  to  rer<lcr  it  rcpu;;nant  to  certain  other 
general  clauses  of  the  innstitulion.     Cf.  infra,  chap,  vi,  §  5. 

^  It  is  important  to  make  this  point  clear  t"-,  .>use  in  the  discussion  of  the 
American  income  tax  in  the  I  rench  chanilier  in  \<to-  iix>i,  »iieral  speakers 
claimed  that  the  Supreme  Court  had  declared  tlu-  income  ta\  i:n>  oiistilutional  on 
the  ground  that  it  sinned  a^;ainst  the  rules  of  e-iuiiav  an  I  unilcrinity. 

»  HyUon  ;j.  United  .State*,  J  Uailas,  171. 


534 


The  Income  Tax 


It". 


direct  tax  in  one  country  is  frequently  excluded  from  that 
category  in  another  country. 

The  question  of  the  constitutionality  of  the  income  tax  has 
had  an  interesting  history.  \\  hen  the  tax  was  first  suggested 
in  1815,  it  was  supposed,  as  we  have  seen,'  that  it  did  not  fall 
wiihin  the  interpretation  of  the  term  "direct  taxes,"  as  indi- 
c.itcd  by  the  Supreme  Court  in  the  carriage  case  in  1796. 
When  the  income  tax  hill  was  discussed  during  the  Civil  War, 
it  was  proposed,  as  we  have  learned,  precisely  for  the  reason 
that  it  was  not  a  direct  tax,  and  that  it  would  therefore  save 
the  country  from  the  difficulties  connected  with  what  was 
called  direct  taxation.''  In  a  series  of  subsequent  decisions 
the  Supreme  Court  announced  its  agreement  with  this  view. 
In  the  case  of  Pacific  Insurance  Company  vs.  Soule,'  it  was 
decided  that  the  income  tax,  as  applied  to  the  income  of 
insurance  companies,  was  not  a  direct  tax ;  in  the  case  of 
Vcazie  Bank  vs.  Fenno*  it  was  held  that  a  tax  on  state  bank- 
notes was  not  a  direct  tax;  in  the  case  of  Scholey  vs.  Rew' 
it  was  decided  that  a  tax  on  successions  was  not  a  direct  tax  ; 
and  in  the  case  of  Springer  vs.  United  States*  it  was  held  that 
the  Civil  War  tax  on  income  from  property  and  professional 
earnings  was  not  a  direct  tax.  It  was  accepted  as  a  part  of 
American  constitutional  law,  and  was  taught  without  excep- 
tion by  all  writers  on  the  subject,  that  the  words  "  direct 
taxes,"  as  used  in  the  constitution,  signified  only  land  and 
poll  taxes. 

In  1894,  however,  the  effort  was  made  to  have  the  Supreme 
Court  put  a  definitive  interpretation  upon  these  words,  and 
in  two  successive  decisions  the  court  now  held  that  the 
income  tax  was  a  direct  tax."  These  cases  were  differenti- 
ated from  the  earlier  ones  by  the  statement  that  it  had  never 
definitely  been  decided  that  the  income  from  real  estate  was 
not  to  be  included  in  the  phrase  "direct  tax."  As  a  matter 
of  fact,  it  happened  that  the  property  from  which  the  tax- 


n 


'  -See  supra,  p.  430.  '■<  .'^ee  supra,  p.  435. 

*  8  Wallace,  533.  ■'  23  WaV  ue,  331. 

'  Pollock  IS.  Farmers  Loan  an  1  Trust  Co.,  157  U.S.,  429 ;  158  U.S.,  6oi. 


»  7  Wallace,  433. 
102  U.S..  5,S6. 


The  Constitntioiialily  of  ihe  Income   Tax     535 

payer's  income  in  the  Springer  case  was  derived  consisted  of 
personalty.  The  court  accordingly  now  held  in  the  first  of 
the  Pollock  cases  that  since  a  tax  on  land  is  a  direct  tax, 
a  tax  on  the  income  from  land  must  also  be  direct ;  and 
in  the  second  case  they  held  that  a  tax  on  income  not  only 
from  real  estate,  but  also  from  personal  property,  was  a  direct 
tax,  and  since  it  is  impracticable  to  differentiate  income  from 
property  from  other  incomes,  the  whole  income  tax,  constitu- 
ting an  entire  scheme  of  taxation,  is  invalid. 

Both  of  these  decisions  were  made  by  a  divided  court, 
the  final  judgment  being  rendered  by  a  bare  majority  of  five 
to  four.  This  was  in  marked  distinction  to  the  earlier  cases, 
in  all  of  which  the  judges  had  been  unanimous.  It  is  but 
natural,  therefore,  that  so  close  a  decision  should  arouse 
widespread  comment  and  much  criticism.  We  shall  hence, 
perhaps,  be  pardoned  if  we  undertake  to  examine  the  whole 
question  afresh  from  the  historical  and  economic  points  of 
view ;  for  the  legal  problem  resolves  itself  into  the  question 
of  what  was  actually  meant  by  the  term  "direct  ta.xes";  and 
that  is  at  once  an  historical  and  an  economic  question. 

In  order  to  answer  this  question,  we  must  consider  several 
points.  First,  what  is  the  economic  meaning  of  the  words 
"direct  tax,"  and  what  light  does  the  answer  throw  upon 
the  constitutional  interpretation }  Secondly,  what  was  the 
origin  of  the  direct-tax  clause,  and  why  was  it  adopted.' 
Thirdly,  what  did  the  framers  of  the  constitution  mean  by 
the  term  "direct  tax".'  And  fourthly,  what  has  the  Supreme 
Court  really  held  as  to  the  meaning  of  the  term,  and  to  what 
extent  arc  its  decisions  justifiable  .' 


§  2.    Tin-  Economic  Mtaning  of  ''Direct  Tav." 

The  words  "direct"  and  "indirect"  taxes  are  of  compara- 
tively recent  origin.'     Passing  over  a  few  stray  and  inconclu- 

'  A  good  sunn,  ary  is  foun.!  in  Professor  C.  J.  Bullock's  article,  "Direct  and 
In<lircct  Taxes  in  i:conumic  Literature,"  Vohtual  Scieiue  Quarterly,  vol.  xiii 
(1898),  pp.  442-486. 


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sive  references  in  the  earlier  European  literature,  it  may  be 
said  that  the  first  scientific  distinction  is  due  to  the  Physiocrats. 
The  Physiocrats,  as  is  well  knqwn,  taught  that  land  is  the 
only  productive  factor,  and  that  therefore  all  taxes  must 
ultimately  be  paid  out  of  the  revenue  of  land.  Consequently, 
they  held,  a  land  tax  is  the  only  direct  tax,  and  all  other 
taxes  which  of  necessity  fall  upon  the  land  indirectly  are 
indirect  taxes.  Sometimes  they  also  conceded  that  a  poll 
tax  might  be  put  in  the  category  of  direct  taxes. 

The  first  time  that  the  phrase  was  used  in  this  sense  was 
in  1757,  when  the  Marquis  of  Mirabeau  wrote  a  book  on 
the  subject.*  This  nomenclature  was  quickly  adopted  by 
Quesnay  and  his  followers,  until  the  distinction  soon  became 
a  familiar  one  in  France.  It  spread  to  other  countries,  includ- 
ing England,  where  a  translation  of  Mirabeau  soon  appeared. 
Turgot,  like  the  other  Physiocrats,  declared  that  the  only 
direct  tax  is  a  tax  on  the  landowner;  that  all  indirect  taxes 
may  be  reduced  to  three  classes :  the  tax  on  the  cultivator  of 
the  soil,  the  tax  on  incomes  from  money  or  business,  and  the 
tax  on  commodities.^  In  another  place,  however,  Turgot 
also  classed  a  poll  tax  as  a  direct  tax,  thus  taking  issue  with 
some  of  the  other  leaders  of  the  Physiocratic  school.  But 
he  held  that  any  kind  of  a  personal  tax  was  an  indirect  tax.' 
"  However,"  added  Turgot,  "  if  the  capitation  be  so  graded 
as  to  reach  the  faculties,  industry,  profits  or  wages,"  —  in 
other  words,  as  we  would  say,  if  the  poll  tax  were  to  develop 
into  an  income  tax  on  the  income  of  anything  but  land, — 
"  then  it  must  be  called  an  indirect  tax."  *  The  Physiocratic 
distinction,  it  may  therefore  be  repeated,  was  that  the  only 
direct  tax  is  a  tax  on  land,  or  on  the  revenue  from  land,  and 
that  even  a  poll  ta.x,  or  a  general  income  tax,  derived  in 
large  part  from  other  sources  than  land,  is  an  indirect  tax. 

'  Cf.  Seligman,  The  Shifting  and  Incidenfe  ef  Taxation,  y\  ed.,  1910, 
p.  132-  '^  Op.  cit..  p.  138. 

•  See  the  quotations  from  Mercier  de  la  Riviere  and  Du  Pont  in  Seligman, 
op.  at.,  pp.  133,  135. 

*  Op.  cit.,  p.  139. 


The  Constitutionality  of  the  Income  Tax    537 


With  the  breakdown  of  the  Physiocratic  theory  of  distribu- 
tion, this  interpretation  of  the  phrase  "direct  tax  "  gradually 
disappeared.  The  distinction  itself  had,  however,  become 
acclimatized,  and  as  the  original  distinction  rested  at  bottom 
on  the  question  of  ultimate  incidence  of  the  tax,  it  was  only 
natural  that  a  new  version  of  tht  distinction  should  arise, 
based  upon  a  more  modern  theory  of  incidence.  This  was  the 
theory  that  direct  taxes  arc  those  where  the  taxpayer  is  the 
tax-bearer,  —  that  is,  where  the  tax  is  not  shifted,  —  and  that 
indirect  ta.xes  are  those  where  the  taxpayer  is  not  the  tax- 
bearer,  —  that  is,  where  the  tax  is  shifted  from  the  one  who 
pays  it  in  the  first  instance. 

In  English  literature  we  find  the  first  inkling  of  this  idea  in 
Locke,  who  speaks  of  "  laying  a  tax  directly  where  it  will  at 
last  settle."  *  But  neither  Locke  nor  Davenant,  who  also 
uses  the  phrase,^  makes  the  distinction  so  clear  as  to  approve 
itself  to  common  usage.  In  1771  Postlethwayt  indeed  speaks 
of  people  paying  ta.xes  directly  or  indirectly,^  but  makes  no 
further  use  of  the  distinction.  Adam  Smith  adopted  the 
term  from  the  Physiocrats,  but  employed  it  in  a  peculiar  way. 
He  divided  taxes  not  into  direct  and  indirect  taxes,  but  into 
taxes  on  rent,  on  profits,  and  on  wages.  Nor  does  his  use  of 
the  term  "  direct  taxes '■  refer  to  the  question  of  incidence; 
for  he  characterizes  as  direct,  taxes  upon  profits  and  upon 
wages,  both  of  which,  according  to  him,  were  shifted.  Uy 
indirect  taxes  Smith  really  meant  taxes  on  expenditure,  a.s 
appears  from  the  following  passage:  "The  state,  not  knowing 
how  to  tax  directly  and  proportionably  the  revenue  of  its 
subjects,  endeavors  to  tax  it  indirectly  by  taxing  their  expense." 
This  was  the  idea  that  was  gradually,  but  very  slowly,  followed 
in  England  until,  by  the  beginning  of  the  nineteenth  century, 
indirect  taxes  came  to  mear.  primarily  customs  and  excise 
duties.  Even  Ricardo,  writing  in  18 17,  did  not  make  the 
classification  into  direct  and  indirect  taxes.     The  later  usage 


•  Seligman,  op.  cit.,  p.  103 

*  Seethe  quotatioi 
pamphlet  of  1730  in  of.  a/.,  p.  105,  note  3 


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;,}! 

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«  See  the  quotation  in  Seligman,  0/.  ci/.,  p.  104,  note  2  ;  see  also  Ihe  anonymous 
,.  .    r :,     .     ..    „    —   -  ._  ,  ■'*  Seligman,  c/.  <(/.,  p.  116. 


'11 


538 


The  Income  Tax 


can  really  be  traced  to  James  Mill,  who  considered  direct 
.  taxes  to  comprise  those  on  rents,  profits,  and  wages,  and 
indirect  taxes  to  be  those  on  commodities.  Since  taxes  on 
commodities  are  usually  shifted,  the  distinction  between  direct 
and  indirect  taxes  came  to  rest  upon  a  consideration  of  their 
shiftability. 

It  was  not  long,  however,  before  the  weakness  of  this  dis- 
tinction became  apparent,  for  it  was  recognized  that  many 
so-called  direct  taxes  were  just  as  susceptible  of  being  shifted 
as  the  so-called  indirect  taxes ;  and,  on  the  other  hand,  that 
where  the  commodity  was  consumed  or  utilized  by  the  person 
who  paid  the  tax  in  the  first  instance,  a  tax  on  commoaities 
would   then   also  become   a  direct   tax.i     John  Stuart  Mill 
recognized  the  force  of  this  objection,  and  attempted  to  make 
a  new  distinction  between  direct  and  indirect  taxes  by  relegat- 
ing the  criterion  to  the  mind  of  the  legislator.     A  direct  tax, 
said  he  in  substance,  is  a  tax  which  the  legislator  intends  shall 
be  borne  by  the  taxpayer,  and  an  indirect  tax  is  a  tax  which 
the  legislator  intends  shall  be  borne  by  some  one  else  than 
the  taxpayer.     This  new  distinction  for  a  time  satisfied  a  few 
writers  ;  but  here,  again,  further  reflection  showed  .the  inade- 
quacy of  the  test.     For,  in  the  first  place,  it  may  be  queried 
whether  the  legislators  have  in  many  cases  any  intention  at 
all  except  that  of  raising  a  revenue ;  and  secondly,  even  if 
they  have  any  idea  in  regard  to  the  ultimate  incidence  of  the 
tax,  how  are  we  to  know  what  their  intention  was.'     Who,  for 
instance,  can  say  what  was  the  intention  of  the  legislators  in 
levying  a  tax  c  railway  passenger  tickets  >     Did  they  intend 
that  the  tax  should  be  borne  by  the  railway  or  by  the   pas- 
senger.'    Of  course  an  answer  is  impossible. 

The  relegation  of  the  distinction  between  direct  and  indi- 

•  In  arguing  the  income  tax  cases  in  1895  Senator  Edmunds  gave  a  definition 
of  direct  taxes,  based  largily  on  this  criterion,  in  eleven  lines,  which  he  thought 
would  be  "generally  found  to  be  universally  true."  Cf.  157  U.S.,  p.  491.  It 
is  very  fortunate  that  legal  reputation  is  so  entirely  divorced  from  economic 
knowledge  ;  for,  with  all  respect  to  Senator  Edmunds,  it  must  be  said  that  the 
merest  tyro  in  present-day  economic  science  could  easily  puncture  almost  every 
successive  clause  in  his  definition. 


The  Consiiiutionaliiy  of  the  Income  Tax    539 


rect  taxes  to  the  mind  of  the  legislator,  therefore,  does  not 
solve  the  difficulty.  Accordingly,  some  writers  reverted  to 
the  distinction  drawn  by  the  French  government  at  an  early 
period,  when  they  adopted  the  phrase  from  the  Physiocrats. 
In  an  ordinance  issued  by  the  Constituent  Assembly  in  1790, 
a  direct  tax  was  defined  as  "  any  tax  which  is  levied  by  means 
of  a  valuation  or  by  an  assessment  roll."  ^  Indirect  taxes, 
therefore,  would  be  those  that  are  levied  not  at  stated 
periods,  but  under  special  circumstances  ;  and  not  by  lists, 
but  by  schedules  or  tariffs  of  charges.  This  distinction,  how- 
ever, while  undoubtedly  valu.ible  for  administrative  purposes, 
is  not  based  upon  any  recognized  economic  difference ;  and 
it  fails,  moreover,  to  draw  a  sharp  line.  For  it  not  infre- 
quently happens  that  certain  taxes  which  would  everywhere 
be  recognized  as  indirect,  are  paid,  as  in  France,  through  a 
kind  of  composition,  and  would  thus  fall  within  the  category 
of  direct  taxes.  The  French  distinction,  accordingly,  which 
at  one  time  influenced  quite  a  number  of  continental  authors, 
never  approved  itself  to  English-speaking  authorities. 

Since  all  these  criteria  of  classification  are  unsatisfactory, 
others  have  been  advanced  by  various  authors.  Thus  some 
writers  say  that  direct  taxes  fall  on  possession,  and  indirect 
on  consumption.  Others  maintain  that  direct  taxes  fall  on 
income,  and  indirect  on  expenditure.  Others  again  contend 
that  direct  taxes  are  compulsory,  and  indirect  taxes  are  volun- 
tary. In  English-speaking  countries  we  find  two  additional 
distinctions.  Thus,  in  the  United  States,  where  the  common- 
wealth revenue  was  until  recently  derived  almost  exclusively 
from  the  general  property  tax,  recent  reforms  have  resulted 
in  the  utilization  of  other  taxes,  like  inheritance  taxes,  ta.xes 
on  corporations,  excise  taxes,  and  the  like.  All  these  taxes 
indiscriminately  are  now  occasionally  called  "  indirect  ta.xes," 
as  over  against  the  only  direct  tax,  which  would  be  the  gen- 
eral property  tax.  But  this  distinction,  as  we  readily  see,  is 
just  as  illegitimate  as  the  old  Physiocratic  distinction.    Again, 

»"Toute  imposition  qui  ce  live  par  les  voies  de  cadastre  ou  des  rSles  de 
cntisatian." 


m 


li!^ 


540 


The  Income  Tax 


I 


the  income  tax,  as  we  have  learned  in  previous  chapters,  may 
be  levied  either  as  a  lump-sum  tax,  or  as  a  stoppage-at-source 
tax.  In  the  case  of  a  lump-sum  tax  it  has  occasionally  been 
said  to  be  directly  levied  on  the  taxpayer,  while  in  the  case  of 
the  stoppage-at-source  tax  it  is  sometimes  said  to  be  levied 
indirectly.  According  to  this  distinction,  a  direct  income  tax 
would  be  the  German  type,  and  an  indirect  income  tax  would 
be  the  English  type.  An  income  tax  would,  therefore,  be 
either  direct  or  indirect,  according  to  the  methods  of  assess- 
ment ;  and  books  have  been  written  with  the  title  "  Direct 
and  Indirect  Income  Taxes."  * 

It  will  readily  be  seen,  therefore,  that  there  are  almost  as 
many  classifications  of  direct  and  indirect  taxes  as  there  are 
authors.  It  is  for  this  reason  that  many  economists  have 
counselled  the  complete  abandonment  of  the  distinction. 
Whatever  may  be  the  advantages  of  its  retention  for  popular 
consumption,  it  is  beyond  all  doubt  that  the  distinction  is  not 
a  scientific  one.  Relying  on  this  fact,  almost  every  country 
has  elaborated  an  administrative  classification  of  its  own,  so 
that  what  is  called  a  direct  tax  in  one  state  is  not  necessarily 
so  called  in  another.  The  scientific,  or  rather,  the  unscientific, 
distinctions  between  direct  and  indirect  taxes  are,  therefore, 
not  available  for  the  purpose  of  affording  a  criterion  which 
has  any  claim  to  precision.  A  definition  of  a  constitutional 
clause,  however,  which  has  no  claim  to  precision  is  worse 
than  useless.  Any  appeal  to  the  usage,  or  lack  of  usage, 
among  economists  is  consequently  of  no  value  in  solving  the 
question  as  to  what  is  meant  by  the  term  in  the  constitution. 


§  3.    The  Historical  Antecedents  of  the  Direct  Tax  Clause 

In  order  to  understand  the  origin  of  the  direct  tax  clause 
in  the  constitution,^  it  will  be  necessary  to  revert  to  the  pe- 

'  Cf\  e.g.,  the  excellent  work  of  Ingenbleek,  mentioned  supra,  p.  321. 

-  All  the  important  facts  upon  which  this  and  the  following  section  are  based 
may  be  found  in  the  Journals  of  the  Continental  Conp-ess.  Washington,  1904 
( hereafter  referred  to  an  Journals);  and  in  the  live  volumes  of  Elliot's  Debates. 
The  first  four  volumes,  of  which  the  second  edition,  with  additions,  was  published 


ii  \ 


The  Constitutionality  of  the  Income  Tax    541 

riod  of  the  confederation.  The  Continental  Congress  had  no 
sooner  assembled,  on  Sept.  5,  1774,  than  it  was  confrontea 
by  the  question  of  voting.  John  Adams,  in  his  diary,  called 
attention  to  the  importance  of  this  fact  in  a  passage  which 
contains  all  the  rival  theories  that  were  to  play  such  a  great 
r61e  in  the  future  :  "If  we  vote  by  Colonics,  this  method  will 
be  liable  to  great  inequalities  and  injustice ;  for  five  small 
Colonies  with  one  hundred  thousand  people  in  each,  may 
outvote  four  large  ones,  each  of  which  has  five  hundred 
thousand  inhabitants.  If  we  vote  by  the  poll,  some  Colonies 
have  more  than  their  proportion  of  members,  and  others  have 
less.  If  we  vote  by  interests,  it  will  be  attended  with  insu- 
perable difficulties  to  ascertain  the  true  importance  of  each 
Colony.  Is  the  weight  of  a  Colony  to  be  ascertained  by  the 
number  of  inhabitants  merely,  or  by  the  amount  of  their 
trade,  the  quantity  of  their  exports  and  imports,  or  by  any 
compound  ratio  of  both .'  This  will  lead  us  to  such  a  field  of 
controversy  as  will  greatly  perplex  us."*     It  was  moved  that 

in  1836,  are  entitled  The  Debatts  in  the  Sez-eral  State  Coiivenlions  on  the  Adoption 
of  the  Federal  Constitution,  as  recommended  ly  the  General  Conzention  at  Phila- 
delphia, in  lySj.  Together  with  the  Journal  of  the  Tedt-nil  Convention,  l.uther 
Martin's  Letter,  Yates'  A/inutes,  Congressional  Opinions,  yiri;ima  and  Kentucky 
Resolutions  of  '(^-gg,  and  other  Illustrations  of  the  Constitution.  Collected  and 
revised  from  Contemporary  Publications.  Uy  Jonathan  Elliot.  Published  under 
the  Sanction  of  Congress.  Second  edition,  with  considerable  additions.  Wash- 
ington, 1836.  The  lifth  volume  is  a  supplementary  one,  containing  Madison's 
Notes  under  the  title  of  Debates  on  the  Adoption  of  the  federal  Constitution  in  the 
Convention  held  at  rhiladelphia,  in  /ySy;  with  a  Diary  of  the  Debates  of  the 
Congress  of  the  Confederation  ;  as  reported  by  James  Madison,  a  Member  and  Dep- 
uty from  Virginia.  Revised  and  newly  arranged  by  Jonathan  Llliot.  Wash- 
ington, 1845.  These  will  hereafter  be  referre<l  to  as  Elliot.  A  careful  study  of 
this  material  has  been  made  by  Professor  C.  J.  Bullock,  in  two  articles  entitled 
"The  Origin,  Purpose,  and  lilTect  of  the  Direct  Tax  flause  of  the  Federal  Consti- 
tution," in  the  Political  Science  Quarterly,  vol.  xv.  (1900),  pp.  2l6,  452.  A  sum- 
mary of  the  discussion  will  be  found  in  Uwight  W.  Morrow,  "The  Income  Tax 
Amendment,"  Columbia  law  Rer'iew,  vol.  x  (1910),  pp.  379-4'S-  ■'^  '"'''*  '"^'- 
entific  summary  will  be  found  in  Foster  and  .\bbott,  A  Treatise  on  the  Federal 
Income  Tax  under  the  Act  of  iSgi.     Boston,  1895,  pj).  14-30- 

'  The  Works  of  John  Adams,  Second  President  of  the  L  'nited  .States :  with  a 
Life  of  the  Author,  Xotes,  and  Illustrations,  vol.  U,  p.  366.  By  his  grandson, 
Chailcs  I'lancii  Adams.     Boston,  1850. 


542 


The  Income  Tax 


each  colony  should  be  allowed  representation  according  to 
its  respective  importance.  This,  however,  seemed  imprac- 
ticable, and  after  considerable  discussion  the  motion  was 
carried  to  give  each  colony  one  vote.' 

The  next  point  was  the  raising  of  the  necessary  supplies. 
Congress,  as  is  well  known,  depended  at  first  upon  the  issue 
of  paper  money,  and  the  arrangement  was  made  that  a 
certain  proportion  of  those  bills  of  credit  should  be  allotted  to 
each  colony,  and  redeemed  by  it.  On  July  29,  1775,  it  was 
resolved  "that  the  proportion  or  quota  of  each  colony  be  deter- 
mined according  to  the  number  of  inhabitants  of  all  ages,  in- 
including  negroes  and  mulattoes  in  each  colony."  As  there 
was  no  means  of  ascertaining  the  amount  of  the  population, 
it  was  determined  to  make  specific  requisitions  on  each  colony, 
which  were  to  be  revised  later,  after  the  numbers  had  been 
ascertained.  Each  colony  was  permitted  to  raise  its  requisi- 
tions in  any  way  that  seemed  best.* 

In  1776  a  committee  was  appointed  to  prepare  articles  of 
confederation  between  the  colonies.  In  the  first  draft  of 
Article  11,  submitted  by  the  committee  on  July  12,  1776,  it 
was  provided  that  the  expenses  "  shall  be  defrayed  out  of  a 
common  treasury,  which  shall  be  supplied  by  the  several  col- 
onies in  proportion  to  the  number  of  inhabitants  of  every  age, 
sex  and  quality,  excepting  Indians  not  paying  taxes";  and 
article  17  provided  that  each  colony  should  have  one  vote.^ 
This  suggestion  led  to  a  warm  discussion.  The  southern 
colonies  objected  to  having  the  slaves  counted  equally  with 
the  whites.  Chase,  of  Maryland,  moved  that  the  blacks  be  not 
counted,  on  the  principle  that  "  negroes  should  not  be  con- 
sidered as  members  of  the  state,  more  than  cattle,  and  that 
they  have  no  more  interest  in  it."  John  Adams  argued  that 
since  numbers  were  taken  as  an  index  of  wealth,  the  slaves 
should  be  included ;  for  "  the  condition  of  the  laboring  poor 
in  most  countries  —  that  of  the  fishermen,  particularly,  of  the 

'^Journals,  vol.  i,  p.  25.  The  discussion  will  be  found  in  Adams,  op  cit.,  vol. 
ii,  pp.  366-368. 

"-Jcuriiaii,  voi.  ii,  p.  21\.  ~^  JoitmuL,  vol.  \,  pp.  548,  550. 


'^ir^&i^m^^!f^--^^>fsm^^^fmf^!&!^i>i!^s^m^^ 


1-%. 


!«jcisffis%?f-;f:^»ssis???ifj«» 


The  CoHstitulionality  of  the  Income   Tax     543 


Northern  States  — is  as  abject  as  that  of  slaves."  Harrison, 
of  Virginia,  suggested  that  two  slaves  be  counted  as  one 
freeman,  because  they  did  not  do  any  more  work.  Wilson 
agreed  with  Adams  on  the  ground  that  otherwise  "  the  south- 
ern colonies  would  have  all  the  benefits  of  slaves,  while  the 
northern  ones  would  bear  the  burden."  Witherspoon,  of  New 
Jersey,  desired  to  avoid  the  difficulty  by  suggesting  the  basing 
of  the  requisitions  upon  the  value  of  lands  and  houses  instead 
of  on  population,  for  those,  he  said,  were  the  "  true  barome- 
ter of  wealth."  The  same  controversy  occurred  on  the  ques- 
tion as  to  the  method  of  voting.  Franklin  thought  that  "  if 
we  vote  equally  we  ought  to  pay  equally."  Wilson  main- 
tained that  "  taxation  should  be  in  proportion  to  wealth,  and 
that  representation  should  accord  with  the  number  of  free- 


men. 


"1 


It  was  not  until  1777  that  the  matter  was  settUd.  On 
October  7  the  small  states  won  their  contention,  and  it  was 
decided  that  each  state  should  have  one  vote.'^  On  October  14, 
after  the  rejection  of  a  plan  for  basing- requisitions  upon  the 
value  of  all  property,  Witherspoon's  original  suggestion  was 
adopted,  and  it  was  resolved  that  the  quota  of  each  state  should 
be  "  ascertained  by  the  value  of  all  land  with  the  buildings  and 
improvements  thereon."  ^  The  committee  report  was  adopted 
as  a  part  of  the  articles  of  confederation,  and  attempts  thit 
were  made  during  1778,  especially  by  Massachusetts  and 
Connecticut,  to  change  the  basis,  were  unsuccessful.*  Sev- 
eral years  later,  one  of  the  southern  members,  Clark,  in  re- 
ferring to  this  controversy,  stated  that  the  southern  states 
would  have  agreed  to  numbers  in  preference  to  the  value  of 
land,  if  one-half  of  their  slaves  only  would  have  been  included ; 
but  he  added  that  the  eastern  states  would  not  agree  to  this.* 

The  articles  of  confederation  were  not  signed  until  1781. 
Both  before  and  after  that  date,  however,  it  was  recognized 


'  Jefferson's  Notes  of  Debate  on  ConfeJe ration  in  Elliot,  vol. 

^Journals,  vol.  ix,  p.  782. 

*Jourtiah,  vol.  ix,  p.  801 ;  and  Elliot,  vol.  i,  p.  81. 


pp.  70-78. 


4«- 


1 


ILlltvi^  \ui.  i,  pp.  S6-SS, 


"  rMioty  vui.  V,  p.  79. 


1 


5SSffi^3S'5S^B^'^!^^Sff^^^5^S3^ 


--:^t^Jfc."  jfii.. 


544 


The  Income   Tax 


that  the  scheme  was  unworkable.  Coiigress  was  not  in  a 
position  to  make  a  vahiation  of  the  real  estate,  and  the  sepa- 
rate commonwealths  were  extremely  remiss  in  sending  in  their 
quotas.  Repeated  efforts  were  made  to  give  Congress  an 
independent  power  of  rai-sing  money.  Proposals  were  intro- 
duced in  turn  for  a  general  impost  on  trade,  for  a  poll  tax, 
for  a  land  tax,  and  for  a  house  and  window  tax.*  But  all  of 
these  proved  unsuccessful.  Finally,  on  June  31,  1783,  the 
subcommittee  of  the  grand  committee  declared  that  it  was 
expedient  to  appoint  one  commissioner  for  each  state,  who 
should  make  the  valuations.  But  much  opposition  was  mani- 
fested, and  one  mei..ber,  Mr.  Dyer,  facetiously  proposed  to 
add  the  words,  "and  that  each  of  the  states  should  cheat 
equally."  '  Considerable  discussion  ensued  as  to  whether  the 
states  should  be  called  upon  to  make  a  return  of  anything  else 
except  the  mere  value  of  the  lands,  and  it  was  finally  resolved 
in  grand  committee,  in  F"ebruary,  1783,  that  Congress  should 
request  the  states  to  make  the  necessary  valuation.  Nothing, 
however,  was  done,  and  on  March  7,  1783,  the  committee  on 
revenue  recommended  an  amendment  providing  that  requisi- 
tions should  be  based  upon  population  and  not  upon  valuation 
of  land.  This  led  to  a  repetition  of  the  old  discussion.  Some 
suggested  that  one- half  of  the  slaves  should  be  counted; 
others  one-fourth,  and  still  others  three-fourths.  Madison 
finally  moved  that  five  slaves  should  be  considered  as  equal 
to  three  freemen,  and  thus  the  famous  three-fifths  provision 
was  introduced.'     On  April  18,  the  report,  as  amended,  re- 

1  ElHol,  vol.  V,  pp.  34-38.  For  the  opposition  of  the  .South  to  the  land  tax, 
see  ibid.,  n.  67. 

-  Elliot,  vol.  V,  p.  44. 

'  Madison  sums  up  the  discussion  as  follows :  "  The  arguments  used  by  those 
vho  were  for  -atinj»  slaves  hifjh  were  that  the  expense  cif  feeding  and  clothing 
thorn  was  as  far  below  that  incident  to  freemen  as  their  industry  and  ingenuity 
were  below  those  of  freemen;  and  that  the  warm  climate  within  which  the  states 
having  slaves  lay,  compared  with  the  rigorous  climate  and  inferior  fertility  of  the 
others,  ought  to  have  great  weight  in  the  case;  and  that  the  exports  of  the  former 
states  were  greater  than  of  the  latter.  On  the  o*;ier  side,  it  was  said  that  slaves 
were  not  put  to  lalior  as  young  as  the  children  of  laboring  families;  that,  having 
no  lutcrcsl  iu  Ihcir  labor,  they  Ud  as  little  as  possible,  and  omitted  every  exertion 


\F-r^^-r.aiiT!^J-'=Mr 


The  Conslitutionalily  of  the  Income  Tax     545 

ceived   the   favorable   votes  of   the   representatives   of  ten 
states. 

According  to  the  constitution,  however,  it  was  necessary  to 
submit  the  amendment  to  each  of  the  separate  states,  and  it 
proved  to  be  impossible  to  secure  universal  consent.  In  1786 
the  effort  was  again  made  to  obtai.i  the  acceptance  of  the 
amendment,!  but  without  success.  Real  estate  thus  remained 
the  basis  of  the  requisitions  until  the  end  of  the  confedera- 
tion.' 

The  federal  convention  began  on  May  25,  1787.  The 
Randolph,  or  Virginia,  resolutions  were  introduced  on  May 
29.  The  second  resolution  provided  that  "the  rights  of 
suffrage  in  the  national  legislature  ought  to  be  proportioned 
to  the  quotas  of  contribution,  or  to  the  number  of  free  inhab- 
itants, as  the  one  or  the  other  rule  may  seem  best  in  different 
cases."  As  this  would  have  precluded  the  imposition  of  any 
import  or  excise  duties  by  the  general  government,  King  and 
Madison  objected  to  the  words  "quotas  of  contribution,"  and 
succeeded  in  having  them  expunged.^  The  resolutions  were 
then  referred  to  a  committee  of  the  whole,  and  were  reported 
back  to  the  convention  on  June  13,  in  the  form  that  the  rights 
of  suffrage  in  both  houses  of  the  legislature  "  ought  not  to  be 
according  to  the  rules  established  in  the  Articles  of  Confed- 
eration, but  according  to  some  equitable  ratio  of  representa- 
tion namely,  in  proportion  to  the  whole  number  of  white  and 
other  free  citizens,  and  inhabitants  of  every  age,  sex,  condi- 
tion, including  those  bound  to  servitude  for  a  term  of  years, 

of  thought  requisite  to  facilitate  and  expedite  it;  that  if  the  exports  of  the  states 
having  slaves  exceeded  those  of  the  others,  their  imports  were  in  proportion, 
slaves  being  employed  wholly  in  agriculture,  not  in  manufactures;  and  that,  in 
fact,  the  balance  of  trade  formerly  was  very  much  m.>re  against  the  Southern 
States  than  the  others."  —  Elliot,  vol.  v,  pp.  79,  80. 

'  Elliot,  vol.  V,  pp.  79,  81. 

■'■  In  the  income  tax  case  of  1895  the  court  fell  into  error  in  stating  that  the 
change  had  actually  been  made.  Kdmund  Randolph  t.lls  us  that  only  twelve  of 
the  thirteen  states  assented.  —  Elliol,  vol.  i,  p.  484.  King  states  that  only  eleven 
had  agreed.  —  Elliot,  vol.  v,  p.  290.  \Vils(m  made  the  same  statement  as  late  as 
December  3,  1787.  —  Elliot,  vol.  ii,  p.  452. 

5  EUiol,  w.l.  V,  p.  154. 

2  N 


If: 


V. 

1 


?^J^^ 


■^ammmm 


I  f. 


546 


The  Income   Tax 


and  three  fifths  of  all  other  persons  not  comprehended  in 
the  foregoing  description  except  Indians  not  being  taxed  in 
each  state." 

In  the  meantime  Paterson  had  submitted,  on  June  15,  reso- 
lutions granting  to  the  new  federal  government  power  to 
raise  revenues  from  duties  on  imports,  stamp  duties  and  pos- 
tal charges,  in  addition  to  requisitions  upon  the  several  states, 
according  to  population  and  in  accordance  with  the  three- 
fifths  rule.  This  plan  would  give  the  general  government 
far  less  powers  than  that  contemplated  in  the  sixth  of  Ran- 
dolph's resolutions,  which  conferred  upon  the  new  Congress 
power  to  legislate  "  in  all  cases  in  which  the  separate  states 
are  incompetent,"  and  which  gave  '  >  the  federal  government 
the  right  to  "  call  forth  the  force  01  the  Union  against  any 
member  of  the  Union,  failing  to  fulfil  its  duty  to  the  articles 
thereof."  •  Paterson's  proposal  to  restrict  the  powers  of  the 
federal  government  were  voted  down  by  the  convention.  So 
vivid  were  the  recollections  of  the  sad  experience  of  the  con- 
federation that  the  convention  was  not  in  a  mood  to  impose 
anv  iinportanc  limitations  upon  the  power  of  the  federal  gov- 
ernment to  collect  a  revenue  of  its  own. 

In  only  three  points  —  apart  from  the  question  of  direct 
taxes,  which,  as  we  shall  see,  must  be  interpreted  in  a  very 
different  way  —  was  there  any  discussion  as  to  the  propriety 
of  restricting  the  fullest  powers  of  taxation  on  the  part  of  the 
national  government.  The  one  was  the  prohibition  of  levying 
a  tax  on  exports.  This  prohibition  was  inserted  at  the  request 
of  Pinckney,  on  the  ground  that  the  tax  would  hit  especially 
the  tobacco,  rice,  and  indigo  produced  by  the  southern  states. 
Af\er  a  long  discussion,  in  which  the  South  made  it  clear  that 
a  tax  on  exports  was  virtually  a  blow  at  slavery,  the  prohibi- 

1  This  sixth  resolution  was  rcportcil  by  the  committee  in  the  following  form: 
"That  the  national  legislature  ought  to  possess  the  legislative  rights  vested  in 
Congress  l)y  the  Confederation  ;  and  moreover,  to  legislate,  in  all  cases,  for  the 
general  interests  of  the  L'nion,  and  also  in  those  in  which  the  states  are  separately 
incompetent,  or  in  which  ttic  harmony  of  the  United  Stat-'S  maybe  interrupted 
by  the  exercise  of  individual  legislation."  —  h.lliot,\o\.  i,  p.  221,  and  vol.  v,  p. 
375 


N  ■ 


>'LW^  w^?r^{-»?r'^Kpt'E9frr,.«^^s 


ym^^'j^^wru 


The  ConstiliitioHality  of  the  Income   Tax     547 

tion  was  enacted  by  a  vote  of  seven  ajjainst  four,  Massacliu- 
setts  and  Connecticut  voting  with  the  five  southern  states.' 
The  second  prohibition  dealt  with  the  import  duty  on  slaves. 
The  orignial  clause  reported  by  the  committee,  on  August  6, 
prohil)ited  the  imposition  of  an  import  duty  on  slaves,  and 
was  opposed  to  the  right  of  Congress  to  interfere  with  the 
slave-trade.     In  this  respect  the  southern  states  finally  made 
a  compromise,  and  accepted  the  arrangement  whereby  the 
right  of  the  federal  government  to  impose  an  import  duty  on 
slaves  was  granted,  although  limited  to  ten  dollars  a  head, 
and  whereby  a  prohibition  of  the  slave-trade  was  permitted 
after  the  year  1808.     In  the  third  place,  the  principle  of  uni- 
formity of  ta.\es  was  adopted.     This  was  due  to  a  considera- 
tion of  the  powers  of  Congress  over  commerce.     On  August 
24  the  committee  appointed  to  consider  the  slave-trade  and 
the  regulation  of  commerce  had  reported  that  Congress  ought 
to  be  given  the  right  to  pa.ss  navigation  acts  by  a  simple  ma- 
jority vote.     This  led  to  a  di-scussion  in  which  some  appre- 
hension was  expressed  lest  Congress  might  favt)r  some  ports 
over  others.     As  a  result  of  a  resolution  introduced  to  meet 
this  difficulty,  the  grand  committee,  on  August  28,  reported  a 
clause  as  follows:  "  Nor  shall  any  regulation  of  commerce  or 
revenue  give  preference  to  the  ports  of  one  state  over  those 
of  another,  or  oblige  vessels  bound  to  or  from  any  state  tcf 
enter  or  pay  duties  in  another,  and  all  tonnage,  duties,  im- 
posts and  excises  laid  by  the  legislature  shall  be  uniform 
throughi.ut  the  United  States."     This  was  adopted  on  Au- 
gust 31  by  the  convention,  after  striking  out  the  word  "ton- 
nage."    Subsequently,  when  the  final  draft  of  the  constitution 
was  considered,  the  resolutions  were  aivided,  and  the  latter 
clause  was  now  added  to  the  section  of  the  constitution  which 
gives  Congress  general  power  to  levy  taxes.    Accordingly,  the 
general  power  of  taxation  conferred  upon   Congress   is  fol- 
lowed by  the  restrictive  words,  "Hut  all  duties,  imposts  and 
excises  shall  be  uniform  throughout  the  United  States."  ^ 

'  The  (liscu-isidti  will  be  f.iund  in  Elliot,  vol.  v,  pp.  \->,2-\lA  and  454-456. 
■•'This  simple  statenunt  <■(  tacts  is  sufncient  to  prove  the  correctness  of  the 
decision  of  the  Supreme  Gjurt  in  Knowlton  vs.  Moore,  and  the  fallacy  of  the  con- 


^'^wfisi^^^^mmw.mr.'''ft!immL^^smst'^smsi'S3ms^-\ 


548 


The  Income  Tax 


C* 


These  three  restrictions  on  the  taxing  power  of  Congress 
are,  as  we  see,  all  of  an  entirely  subordinate  nature,  and  do 
not  in  any  important  way  limit  its  revenue  rights.  Of  an 
entirely  different  character,  however,  is  the  direct  tax  clause, 
which,  as  we  shall  learn,  had  its  origin  not  in  the  question  of 
the  general  tax  powers  of  government,  but  in  the  dispute 
over  the  problem  of  representation. 

%  4.    The  Introduction  of  the  Direct  Tax  Clause 

The  critical  question  in  the  convention  was  that  of  the 
basis  of  representation.  The  larger  states  naturally  demanded 
a  representation  which  should  be  proportioned  either  to  wealth 
or  to  population,  or  to  some  similar  criterion  ;  the  smaller 
states,  on  the  other  hand,  held  out  strongly  in  favor  of  equ;  ' 
representation.  The  first  contest  took  place  over  the  repre- 
sentation in  the  upper  House.  On  June  1 1,  1787,  by  a  vote 
of  six  to  five,  the  committee  of  the  whole  recommended  that 
the  representation  in  the  upper  House  should  be  the  same  is 
in  the  lower.  On  June  29  the  convention  voted  that  the  right 
of  suffrage  in  the  lower  House  ought  not  to  be  according 
to  the  rule  established  in  the  articles  of  confederation,  but 
according  to  some  equitable  ratio  of  representation.  The 
smaller  states  thereupon  made  a  vigorous  fight  for  equal  rep- 
resentation in  the  upper  House,  but  this  Vvas  defeated  by  a  tie 
vote,  the  delegates  of  Georgia  being  divided.  The  matter 
was  then  referred  to  a  grand  committee,  which  on  July  5 
reported  Franklin's  scheme  for  equal  representation  in  the 
upper  House,  and  proportionate  representation  in  the  lower 
House.  This  was  called  the  Great  Compromise.  On  July  6 
the  question  of  representation  in  the  lower  House  was,  on 
motion  of  Gouvcrneur  Morris,  referred  back  to  a  special 
committee  of  five,  while  the  contention  of  the  smaller  states 
for  equal  representation  in  the  upper  House  was  accepted  on 
j  uly  7  as  a  necessary  concession. 

tention  of  Messrs.  Chuate  and  Gulhrie  in  the  income  tax  cases  that  the  uniformity 
required  by  the  constitution  meani  anything  else  than  territorial  uniformity. — 
See  infra,  chap,  v,  §  9. 


V-  - 


m. 


The  Constitutionality  of  the  Income   Tax     549 

Then  began  the  battle  on  the  question  of  representation  in 
the  lower  House.  Here  the  centre  of  the  controversy  shifted 
from  that  between  the  large  and  the  small  states  to  that  be- 
tween the  northern  and  the  southern  states.  As  Madison 
stated  a  few  days  later :  "  It  seemed  now  to  be  pretty  well 
understood,  that  the  real  difference  of  interest  lay,  not  be- 
tween the  large  and  small,  but  between  the  northern  and 
southern,  states.  The  institution  of  slavery  and  its  conse- 
quences formed  the  line  of  discrimination."  »  On  July  9  the 
special  committee  of  five  referred  to  above  made  its  report, 
which  assigned  a  number  of  representatives  in  the  first 
Congress  to  each  state,  and  then  provided  that  in  future  the 
legislature  should  "  regulate  the  number  of  representatives 
upon  the  principles  of  wealth  and  numbers." 

This  led  to  a  heated  discussion  as  to  whether  the  future 
representation  should  be  based  upon  property  or  upon  num- 
bers, and  if  upon  numbers,  how  slaves  should  be  counted. 
It  was  soon  recognized  that  the  principle  of  numbers  alone 
would  not  suffice,  and  it  was  here  that  some  jealousy  of  the 
western  states  was  manifested.  Gorham,  of  the  committee 
of  five,  claimed  that  a  representation  based  upon  both  wealth 
and  numbers  was  necessary,  as  otherwise  the  East  would 
ultimately  be  outvoted  by  the  West.  Although  Gouverneur 
Morris,  as  well  as  King  and  Gerry,  took  the  same  position,  the 
majority  of  the  members  did  not  share  these  fears.  On  July 
14  Gerry  moved  that  the  number  of  representatives  should 
be  so  regulated  that  states  subsequently  admitted  could  never 
outvote  the  original  members  of  the  Union.  But  this  was 
voted  down  by  a  large  majority,  and  we  hear  very  little  more 
about  the  jealousy  of  the  western  states. 

The  real  fight  came  not  over  West  and  East,  but  over  North 
and  South.  The  committee  of  five  recommended  the  ap- 
portionment in  the  first  legislature  of  twenty-si.x  members  to 
the  South  and  thirty  members  to  the  North.  This  recom- 
mendation was  referred  back  to  another  committee  composed 
of  one  representative  from  each  state,  and  the  report  of  this 

1  Elliot,  vol.  V,  p.  3«S- 


ti : 


f  <  ; 


!       I 


I 


550 


The  Income   Tax 


:| 


■  i   ?! 


committee  on  July  lo  changed  the  numbers  to  thirty-five  to 
the  North  as  against  thirty  to  the  South.  After  vain  efforts 
on  the  part  of  the  southern  states  to  increase  their  numbers, 
the  recommendation  was  adopted.  Then  arose  the  question 
of  future  representation.  According  to  the  report  of  the 
committee  of  five,  the  matter  was  to  be  left  in  the  hinds  of 
the  legishiture.  Hut  as  a  majority  of  the  legislature  had  now 
been  decided  to  consist  of  northern  members,  the  North  would 
have  the  whip-hand.  Randolph  accordingly  proposed  an 
amendment  whereby  the  legislature  should  "cause  a  proper 

census  and   estimate  to  be  taken  once  in  every  term  of 

years."  This,  however,  failed  of  adoption.  On  July  ii 
Williamson,  of  North  Carolina,  introduced  a  substitute  motion 
providing  that  a  periodical  census  should  be  taken  of  the  free 
inhabitants  of  each  state,  "  and  three-fifths  of  the  inhabitants 
of  other  description,"  and  that  representation  should  be  ap- 
portioned accordingly.  The  three-fifths  clause  was  thus  again 
brought  to  the  attention  of  the  convention,  and  was  attacked 
by  the  radicals,  both  northern  and  southern.  For  the  extreme 
southerners  now  wanted  to  have  all  the  slaves  counted  equally 
with  the  whites,  and  the  extreme  northerners  were  equally 
insistent  upon  having  none  of  the  slaves  counted.  Through 
a  combination  of  these  radicals,  both  North  and  South.  Will- 
iamson's resolution  was  voted  down,  and  the  convention 
seemed  to  have  arrived  at  a  dead-lo,:k. 

It  was  at  this  juncture  that,  on  the  morning  of  July  12, 
when  the  whole  fate  of  the  convention  appeared  to  hang 
upon  the  decision  as  to  the  representation  of  slaves,  Gouverneur 
Morris  introduced  his  famous  motion  to  add  to  the  clause 
empowering  the  legislature  to  vary  the  representation  accord- 
ing to  the  principles  of  wealth  and  numbers  of  inhabitants,  a 
proviso  "that  taxation  shall  be  in  proportion  to  representa- 
tion." Thi?  .vas  an  entirely  new  suggestion,  although  the 
proposition  in  its  reverse  form  —  that  representation  should 
be  proportioned  to  taxation  —  had  occasionally  been  advanced, 
both   in  the  Continental  Congress  and  in  the  convention.^ 

'  .Sec  the  (|uotations  in  Bullock,  op.  (it.,  p.  2??.  note  3. 


The  Constitutionality  of  the  Income  Tax     551 

The  aim  of  Morris  was  to  overcome  the  objections  of  the 
extremists  on  both  sides.  He  hoped  that  the  southerners 
might  be  induced  to  accept  the  three-fifths  proposition,  rather 
than  to  insist  upon  full  representation,  because  it  would  then 
proportionately  diminish  their  quota  of  contribution  ;  and  that, 
on  the  other  hand,  it  would  appeal  to  the  extremists  of  the 
North,  on  the  ground  that  if  the  three-fifths  clause  passed, 
the  South  would  have  to  pay  something,  at  all  events,  for 
their  slaves.  As  Madison  puts  it :  "  The  object  was  to  lessen 
the  eagerness  on  one  side  for,  and  the  opposition  on  the  other 
side  to,  the  share  of  representation  chimed  by  the  Southern 
states  on  account  of  the  negroes."  *  Morris  himself,  who  was 
a  strong  nationalist,  and  not  disposed  to  restrict  the  powers  of 
the  new  government  in  any  way,  stated  subsequently  that  he 
had  "  only  meant  the  clause  as  a  bridge  to  assist  us  over  a 
certain  guif."^ 

It  was,  however,  at  once  pointed  out  by  Mason,  who  ad- 
mitted the  justice  of  the  principle,  that  the  clause  was  badly 
worded,  in  that  it  might  drive  Congress  to  resort  to  the  discred- 
ited plan  of  requisitions.  Morris,  who  thereupon  conceded 
that  his  motion  was  open  to  these  objections,  "  supposed  they 
would  be  removed  by  restraining  the  rule  to  direct  taxation,"  ^ 
and  added  :  "  With  regard  to  indirect  taxes  on  exports  and 
imports,  and  on  consumption,  the  rule  would  be  inapplicable." 
Wilson  as  well  as  Pinckney  approved  of  the  suggestion,  and 
Morris,  having  varied  his  motion  by  inserting  the  word 
"  direct,"  the  convention  unanimously  accepted  it  so  that  it 
read  "  provided  always  that  direct  taxation  ought  to  be  pro- 
portioned to  representation."* 


I] 


ir 


! '-! 


>  FMiot,  V..1.  V,  p.  363.  2  //.;./. 

'  Later  on,  Morris  was  by  no  means  sure  that  tlie  objections  would  be  so 
removed.  On  May  8,  1789,  after  the  a'loption  of  the  constitution,  he  statei! : 
"There  is  a  further  inconvenience,  whiih  arises  from  the  n-eessity  of  ajiportion- 
ing  direct  taxt:;  in  a  manner  fixed  by  the  Constitution.  1  his,  which  seems  to 
force  Congress  into  rei]uisitions.  leads  thereby  to  perpetuate  tliat  ineffective  sys- 
tem." —  Sparks,  Life  of  (Jouierneur  Morris,  vol.  iii,  p.  47 1 .      ( 'f,  M   rrow,  of.  cit., 

V-  393- 

*  I'.Uiot.  y*j!.  V.  i>.  "^04. 


;  \'. 


i 


i 


f 


f 


u 


^■■ 


552 


T/ie  Income   Tax 


From  this  recital  of  the  facts  two  poi.  ts  are  clear.  First, 
the  introduction  of  the  words  "direct  taxes"  had  no  refer- 
ence to  any  dispute  over  tax  matters,  but  was  designed  solely 
to  solve  the  difficulty  connected  with  representation ;  and 
secondly,  direct  taxation,  according  to  Morris'  motion,  was 
to  be  proportioned,  not  to  population  alone,  i  it  to  wealth  as 
well  as  population. 

After  the  adoption  of  the  amendment,  the  southerners 
desired  to  have  the  matter  more  precisely  determined. 
Pinckney  stated  that  he  wanted  the  rule  of  wealth  to  be 
ascertained,  and  not  left  to  the  pleasure  of  the  legislature. 
Randolph  lamented  that  such  a  species  of  property  as  slaves 
existed ;  but  inasmuch  as  it  did  exist,  the  holders  of  it  would 
require  this  security.  He  thereupon  made  a  motion  which, 
after  a  slight  amendment  by  Wilson,  was  adopted  by  the 
convention.  This  made  Morris'  clause  read  as  follows : 
"  Provided  always  that  the  representation  ought  to  be  pro- 
portioned according  to  direct  taxation ;  and  in  order  to  as- 
certain the  alterations  in  the  direct  taxation  which  may  be 
required  from  time  to  time  by  the  changes  in  the  relative 
circumstances  of  the  states.  Resolved  that  a  census  be  taken 
within  two  years  from  the  first  meeting  of  the  legislature  of 

the  United  States,  and  once  within  the  term  of  every  

years  afterwards,  of  all  the  inhabitants  of  the  United  States, 
in  the  manner  and  according  to  the  ratio  recommended  by 
Congress  in  their  resolution  of  the  i8th  of  April,  1783,  and 
that  the  legislature  of  the  United  States  shall  apportion  the 
direct  taxation  accordingly." '  The  ratio  referred  to,  it  will 
be  remembered,  was  that  of  counting  a  negro  as  three-fifths 
of  a  fre     -in. 

On  xt  day  final  action  was  taken.     The  original  prop- 

osition, it  must  not  be  forgotten,  had  been  to  regulate 
representation  according  to  wealth  and  numbers.  In  the 
meantime  that  convention  had  just  adopted  Randolph's  res- 
olution that  representation  should  be  proportioned  to  direct 
taxation,  and  that  direct  taxation  should  be  proportioned  to 
*  Elliot,  V.!.  V,  p.  304. 


If 


The  Constitutionality  of  the  Income  Tax     553 

population.  Randolph  therefore  now  moved  that  the  origi- 
nal motion  be  amended  by  striking  out  the  word  "  wealth." 
Gouverneur  Morris  objected  strongly  to  the  amendment,  but  it 
was  adopted  by  an  almost  unanimous  vote.  Thus  the  matter 
was  settled  that  representation  should  be  proportioned  to 
direct  taxation,  and  that  direct  taxation  should  be  propor- 
tioned to  population,  counting  a  negro  as  three-fifths  of  a  free- 
man.* On  July  16  the  report  of  the  grand  committee,  which 
contained  this  amendment,  was  adopted  by  a  bare  majority,  and 
thus  the  great  compromise  was  effected.  But  Gouverneur 
Morris  was  now  not  satisfied  with  his  own  proposition.  On 
July  17  he  moved  to  reconsider  the  whole  compromise  resolu- 
tion, and  on  July  24  he  expressed  the  hope  that  at  least  the 
committee  "  would  strike  out  the  whole  of  the  clause  apportion- 
ing direct  taxation  to  representation.  He  had  only  meant  it 
as  a  bridge  to  assist  us  over  a  certain  gulf  ;  having  passed  the 
gulf,  the  bridge  may  be  removed.  He  thought  the  principle 
laid  down  witli  so  much  strictness  liable  to  strong  objections."  "^ 
But  the  convention  having  once  settled  this  most  delicate 
matter,  refused  to  take  it  up  again. 

The  principle  having  been  settled,  the  matter  was  referred 
to  the  committee  of  appeal  which,  on  August  6,  reported  back 
its  first  draft  of  a  constitution.  This  draft  gave  Congress 
power  "  to  lay  and  collect  taxes,  duties,  imposts  and  excises." 
The  committee  reported  in  favor  of  separating  the  resolutions 
relating  to  representation  and  direct  taxes.  On  August  8, 
when  the  question  of  the  census  came  before  the  convention, 
Morris  made  a  final  effort  against  the  clause  for  which  he 
himself  had  been  responsible.  He  delivered  a  savage  attack 
upon  slavery,  and  concluded  that  "  he  would  sooner  submit 
himself  to  a  tax  for  paying  for  all  the  negroes  in  the  United 
States  than  saddle  posterity  with  such  a  Constitution."  ^  But 
Sherman  contended  that  the  compromise,  as  adopted,  was 
unexceptionable,  for  "  it  was  the  farmers  of  the  southcin 
states  who  were,  in  fact,  to  be  represented,  according  to  the 
tax  paid  by  them,  and  the  negroes  are  only  included  in  the 

1  Elliot,  vol.  V,  p.  joy.  -  ibid.,  p.  36 J.  "  Ufi.-,  I'p.  392-393- 


w 


* . 


li' 


554 


The  Income  Tax 


If 


jl 


estimate  of  the  taxes."  The  arrangement  was  changed  by 
the  committee  on  style,  which  reported  on  September  12. 
The  committee  again  brought  together  the  two  clauses  as  to 
representation  and  taxation,  and  used  the  words  "direct 
taxes  "  instead  of  "  direct  taxation."  Article  I,  section  2,  was 
make  to  read  that  "  representatives  and  direct  taxes  shall  be 
apportioned  among  the  several  states  which  may  be  included 
within  this  Union  according  to  their  respective  numbers, 
which  shall  be  determined  by  adding  to  the  whole  number  of 
free  persons,  including  those  bound  to  servitude  for  a  term 
of  years,  and  excluding  Indians  not  taxed,  three-fifths  of  all 
other  persons."  When  the  report  came  up  for  di.scussion  on 
September  1 3,  Dickinson  and  Wilson  moved  to  strike  out  the 
words  "  direct  taxes  "  as  being  improperly  placed.  But  after 
a  defence  of  the  point  by  Gouverneur  Morris,  the  report  was 
adopted  by  a  large  majority. 

The  term  "dhect  tax"  is  used  in  one  other  clause  of  the 
constitution,  where  it  is  put  in  connection  with  the  capitation 
tax.  On  August  6  the  committee  on  detail  reported  a  reso- 
lution that  "  no  capitation  tax  shall  be  laid  unless  in  propor- 
tion to  the  census  hereinbefore  provided  to  be  taken."  This 
originated  in  the  contest  over  the  slave-trade  and  the  possible 
import  duty  on  slaves.  The  southerners  evidently  feared  that 
Congress,  with  its  northern  majority,  might  decide  to  make 
an  arbitrary  computation  of  population,  and  thus  saddle  the 
south  with  an  undue  share  of  taxation  through  a  tax  on  slaves. 
It  was  in  order  to  prevent  this  that  the  capitation  clause  was 
introduced.  It  awakened  no  objection  at  all,  since  it  was 
practii  allv  a  confirmation  of  the  compromise  that  had  been 
adopted,  and  it  came  before  the  convention  for  final  vote 
on  Septemoer  14.  In  the  meantime  various  suggestions 
had  been  made  looking  toward  the  securing  from  the  de- 
linquent states  payment  of  the  old  requisitions  for  which 
they  had  been  liable  under  the  Confederacy.  Reade,  of  Dela- 
ware, in  order  to  obviate  this,  or  to  u.se  his  own  words,  in 
order  to  prevent  the  attempt  "  to  saddle  the  states  with  the 
readjustment  by  this  rule  of  past  requisitions  of  Congress," 


# 


The  Constitutionality  of  the  Income  Tax     555 

moved  that  the  words  "  or  other  direct  tax  "  be  inserted  after 
the  word  "capitation."  He  maintained  "that  his  amend- 
ment, by  giving  another  cast  to  the  meaning,  would  take 
away  the  pretext,"  and  his  motion  was  adopted  without  any 
discussion.* 


If 

it 


s%-- 


§  5.    The  Purpose  of  the  Direct  Tax  Clause 

From  the  above  review  of  the  origin  of  the  direct-tax  clause 
it  is  clear  that  it  was  due  simply  and  solely  to  the  attempt  to 
solve  the  difficulty  connected  with  the  maintenance  of  slavery. 
But  for  that  struggle  Gouvcrneur  Morris  would  never  have 
introduced  the  term  "  direct  tax,"  and  there  wou'd  have  been 
no  reason  to  introduce  it  anywhere  else. 

It  is  true  that  the  counsel  in  the  income  tax  cases  of  1895 
advanced  a  different  doctrine.  Mr.  Choate,  in  his  argument, 
stated  that  the  clause  was  the  result  of  a  compromise  designed 
to  protect,  on  the  one  hand,  the  states  in  general  against  the 
federal  government,  and  on  the  other  hand,  the  richer  states 
against  the  poorer.  He  tells  us  that  "  there  was  a  surrender 
by  the  States  to  Congress  of  the  exclusive  power  to  levy  taxes 
on  imports.  .  .  .  Then,  too,  the  States  surrendered  forever 
afterwards  the  right  that  they  had  had  of  taxing  and  regulat- 
ing commerce  between  the  States.  .  .  .  Then  came  the  grant  to 
Congress  of  power  to  lay  indirect  taxes,  as  we  now  call  them." 
All  these  were  an  "  essential  part  of  the  compromise  "  whereby 
the  power  of  the  federal  government  to  levy  taxes  was  re- 
stricted.2  Moreover,  the  rule  of  apportionment  results  "in 
a  law  of  protection  for  the  benefit  of  the  holders  of  such 
property  as  was  contemplated  as  the  subject  of  direct  taxes. 
.  .  .  There  had  occurred  an  accumulation  of  wealth /f;vrt'///'rt 
in  certain  states  to  a  greater  extent  than  in  other  states. 
This  disproportion  existed  then,  as  it  exists  now,  only  differ- 
ent in  degree.     It  wa^  just  this  disproportion  that  the  provi- 

*  Elliott,  vol.  V,  p.  545. 

2  Clflsiiii;  .  hxwifnt  l>y  Mr.  Choatr  in  the  Pollock  Case,  1895,  P-  34-    The  argu- 
ment is  summarized  in  157  U.S.,  p.  543. 


556 


The  Income  Tax 


If'- 


\l 


sion  as  to  apportionment  was  intended  to  protect.  ...  It 
was  then  understood  perfectly  well  to  be  a  rule  of  inequality, 
on  the  sticngtb  if  which  was  bought  the  assent  of  the  States 
then  owning  such  property."  Mr.  Choatc  closed  by  stating : 
"The  question  to-day  is  whether  that  bargain  shall  be  re- 
pudiated. Your  Honors  know  what  the  scabtard  States 
"•ave  up  for  it.  .  .  .  Now  the  question  is  whether  the  other 
States,  in  who.se  behalf  and  for  who.se  benefit  that  was 
given  up,  shall  take  back  the  price  for  which  it  was  given."  ' 
And  to  clinch  his  argument  Mr.  Choate  added  that  the  intro- 
duction of  the  term  "direct  ta.xes"  in  the  clause  prescribing 
that  no  capitation  or  other  direct  tax  .should  be  levied  accord- 
ing to  the  census  was  due  to  the  same  cause.  The  framers 
of  the  constitution  "  were  fresh  from  the  struggle  about  repre- 
sentation going  hand  in  hand  with  taxation,  and  it  was  for 
the  protection  of  this  property,  this  accumulated  property  in 
the  States,  as  against  the  inroad  of  the  vote  of  mere  num- 
bers, that  they  stipulated  and  insisted  upon  the  guaranty  of 
apportionment."'^ 

This  argument  approved  itself  to  the  court.  Chief  Justice 
Fuller,  in  the  opinion,  stated  :  "  Thus  was  accomplished  one 
of  the  great  compromises  of  the  Constitution,  resting  on  the 
doctrine  that  the  right  of  representation  ought  to  be  conceded 
to  every  community  on  which  a  tax  is  to  be  imposed,  but 
crystallizing  it  in  such  form  as  to  allay  jealousies  in  respect 
to  the  future  balance  of  power.^"  In  the  separate  opinion  of 
Justice  Field  the  same  view  is  contained  :  "The  States  bor- 
dering on  the  ocean  were  unwilling  to  give  up  their  rights  to 
lay  duties  upon  imports,  which  were  their  chief  source  of 
revenue.  The  other  States,  on  the  other  hand,  were  unwill- 
ing to  make  any  agreement  for  the  levying  of  taxes  directly 
upon  real  and  personal  property,  the  smaller  States  fearing 
that  they  would  be  overborne  by  unequal  burdens  forced 
upon  them  by  the  action  of  the  larger  States.  .  .  .     But  hap- 

'  Clomi.;  .  Uxii»ii->it  h'  ■''''■•  '"^'""''  '"  '■''"•  /'"''''"'  ^'  ''""•  ■'^95.  P-  35- 
«  Pollock  %s.  the  larmors  Loan  \  Trust  ("ompany,  157  U.S.,  p.  563. 


The  Constitutionalily  of  the  Income   Tax     557 

pily  a  compromise  was  effected  by  an  af;rcemciu  that  dirtct 
taxes  should  be  laid  by  Congress  by  apportioning  them.  .  .  . 
This  compromise  protected  every  State  from  being  controlled 
in  its  taxation  by  the  superior  numbers  of  one  or  more  other 
States."  '  In  the  second  Pollock  case  the  court  restated  its 
position  as  follows:  "The  reasons  for  the  clauses  of  the 
Constitution  in  respect  of  direct  taxation  are  not  far  to  seek. 
The  States,  respectively,  possessed  plenary  powers  of  taxa 
tion.  .  .  .  They  gave  up  the  great  sources  of  revenue  derived 
from  commerce;  .  .  .  they  retained  the  power  of  direct  taxa- 
tion, and  to  that  they  look  as  their  chief  resource ;  but  even 
in  respect  of  that  they  granted  the  concurrent  power.  .  .  . 
Therefore,  they  did  not  grant  the  power  of  direct  taxation 
without  regard  to  their  own  condition  and  resources  as 
States.  ...  If,  in  the  changes  of  wealth  and  population  in 
particular  States,  apportionment  produced  ine(|uality,  it  was 
an  inequality  stipulated  for,  just  as  the  equal  representation  of 
the  States,  however  small,  in  the  Senate,  was  stipulated  for."'' 
In  the  light  of  actual  history,  as  it  has  been  explained  above, 
all  these  statements  must  be  characterized  as  essentially  er- 
roneous. It  is  true  that  when  the  constitution  was  submitted 
tc  the  different  states  for  ratification,  some  jealousy  of  the 
powers  granted  to  Congress  was  in  a  few  instances  manifested. 
But  there  was  no  difficulty  in  overcoming  this  objection.  In 
the  convention  itself,  however,  which  framed  the  constitution, 
there  was  no  trace  of  any  such  conflict  in  connection  with 
the  taxation  clause,  just  as  we  have  seen  that  there  was  no 
effort  and  no  disposition  on  the  part  of  the  convention  to 
restrict  the  general  tax  powers  of  the  government.  The 
states  did  not  even  question  the  advisability  of  abandoning 
their  rights  to  impose  import  duties,  and  every  one  agreed 
that  the  old  svstem  of  requisitions  must  be  done  away  with. 
There  was  no  jealousy  of  large  states  on  the  part  of  small 
states  that  manifested  itself  at  all  in  the  discussion  over  the 
tax  provisions  ;  the  sporadic  allusions  to  the  future  develop- 
ment of  the  western  states  were  fcHind.  as  we  have  seen,  only 

»  157  U.S..  [).  587.  »  15**  ^'^  -  6.:c>-62l. 


558 


The  Income  Tax 


Hi 


t 


K' 


in  the  discussion  of  the  original  clauses  affectint;  representa- 
tion, and  they  played  no  role  at  all  in  the  tax  discussion. 
The  introduction  of  the  words  "direct  tax"  in  the  phrase 
"no  capitation  or  other  direct  tax  "  had,  as  we  know,'  nothing 
whatever  to  do  with  the  compromise  of  which  Mr.  Choate 
and  the  court  speak,  far  from  being  a  question  of  the  small 
states  against  the  large  states,  or  of  the  seaboard  states 
against  the  western  states,  or  of  the  states  in  general  against 
the  federal  government,  the  compromise  was  due  solely  to  an 
effort  of  the  slave  states  to  protect  the  three-fifths  rule. 

That  the  Supreme  Court  of  the  Inited  States  was  misled 
by  the  counsel  into  an  historical  interpretation  which  is  be- 
yond all  doubt  erroneous,  is  deplorable ;  but  that  in  view  of 
the  material  that  has  since  come  to  light,  and  of  the  later 
investigations  on  the  subject  that  have  been  made,  this  inter- 
pretation should  still  be  advanced,  is  still  more  deplorable. 
In  a  memorandum  submitted  to  the  legislature  of  the  state  of 
New  York,  in  opposition  to  the  proposed  sixteenth  constitu- 
tional amendment,  signed  by  six  eminent  lawyers,  two  of 
whom  argued  this  very  point  in  the  income  tax  ca.scs,  the 
same  statement  is  repeated  as  almost  a  self-evident  f.'-.t.  "  As 
all  students  know,  the  provisions  of  the  constitution  as  to 
representation  and  apportionment  of  taxes  were  the  result  of 
a  compromise  after  a  fierce  contest.  If  the  smaller  states 
were  to  be  given  a  representation  in  the  Senate  equal  to  the 
populous  states,  it  was  understood  that  the  smaller  states 
must  agree  to  observe  some  rule  which  would  protect  the 
other  states  against  the  possible  abuse  of  the  taxing  power. 
The  question  now  is  whether  that  compromise  shall  be  aban- 
doned and  its  protection  thrown  away  without  any  considera- 
tion'or  any  check  against  possible  abuse."  ^     It  is  to  be  hoped 

>  Supra,  p.  554. 

'  Memorandum  submitted  to  the  I.eipsliiture  of  the  State  of  Xnv  York  in 
Opposition  to  the  Proposed  Sixteenth  Artide  of  Amen  Intent  I:'  the  Constitution  of 
the  i'nited  States.  By  Joseph  11.  Chciate,  William  I),  (".uthrie,  Victor  Morawct.r, 
Austen  O.  Fox,  John  (I.  Milburn,  Frances  I.vnde  Stetson.  The  same  statement 
is  repeated  in  an  r,paniled  and  still  moie  indefensible  form  in  Mr.  ("lUthrie's 
speech,  entitled   "Wo  Taxatiun    without  Representation,"    in   J  he  Journal  oj 


n 


The  Constitutionality  of  the  Income   Tax     559 

that  no  serious  student  of  history  or  economics  will  cvcra^jain 
be  led  astray  by  what  is  a  no  doubt  unconscious,  hut  none 
the  less  lamentable,  misapprehension  of  historical  fact.  The 
direct-tax  clause  was  inserted  into  the  constitution  simply  and 
solely  as  a  concession  to  slavery,  and  with  the  disa|)pearaiHe 
of  slavery  and  the  adoption  of  the  fourteenth  amendment 
the  very  reason  of  its  existence  passed  away. 


'•1 


§  6.    The  Constitutional  Meaning  of  "  Dinit  Tax " 

Now  that  the  origin  and  the  purjjosc  of  the  term  "  direct 
tax"  have  been  elucidated,  it  remains  to  ascertain  what  the 
founders  of  the  constitution  really  meant  by  the  term.  In 
what  sense  did  they  use  the  words  ?  Did  it  have  any  definite 
meaning,  and  if  so,  what  ? 

It  may  be  pointed  out  in  the  first  place  that  the  words  in 
the  constitution,  "taxes,  duties,  imposts  and  excises,"  were 
used  without  any  precise  signification.  The  nomenclature  of 
taxation  —  even  the  legal  nomenclature  —  ha>  iged  from 

century  to  century  and  from  country  to  com.  /.  As  has 
been  pointed  out  elsewhe.e,  there  were  no  less  than  seven 
different  stages  in  the  etymological  growth  of  the  terms  used 
to  designate  taxes.  Benevolence,  aids,  subsidies,  contribu- 
tions, duties,  imposts,  and  rates  were  all  at  one  time  or  another 
generic  terms  for  tax.'  In  the  England  of  the  eighteenth 
century,  while  imposts  and  excises  had  come  to  possess  a 
more  restricted  meaning,  the  word  "duty"  was  a  generic 
term  applied  to  every  source  of  revenue  except  the  land  tajc. 

.'Ucount.incy,  vol.  lo  (l9Io),pp  13-14.  He  thrrcsays  ;  "  Iht-j^'iat  i|Uesiiun  was. 
sh.iU  He,  the  strong  states  tliat  have  IjDrnc  the  lirunt  'if  the  Kcv  jlutiun,  wh.'se 
treasury  has  been  poured  out  that  the  L'nion  might  livi-,  shall  we  place  our  fur- 
tunes  and  our  property  at  the  mercy  of  perhaps  an  irresponsiMc  maioril>-.  .  .  . 
The  compromise  was  .  .  .  that  the  men  whu  were  voting;  to  impose  iirect  taxes 
should  he  compellel  to  imi)Ose  these  taxes  proporti.mately  ujton  their  constitu- 
ents." .\s  a  matter  of  fact.  Virginia  did  not  vote  «ith,  hut  against,  the  other 
large   states    like    \ew  Vcj.'k,   Massachusetts,   an  1    Pennsylvania  in  the   contests 

that  preceded  the  compromise. 

1  c  f  ^     -       '  .'.I   '''      ......      -*».  .1     ..»^>*    ....   /■.   « 


:      1 


« 


56o 


Tht  Income   Tax 


Thu«  we  find  the  "house  dutv  "  and  th-  "window  duty,  "  as 
well  as  the  "tea  duty  "  and  the  "tobacco  duty.  "  When  the 
income  tax  was  Introduced,  it  was  also  officially  designated  as 
the  "duty  on  profits,"  or  the  "income  duty."  So  when  the 
inheritance  tax  was  introduced,  it  was  called  the  "  succes- 
sion duty,"  or  the  "death  duties."  This  is  still  the  IcRal 
usaRC  of  Kiif^land.  "Duties"  still  comprise  most  of  the 
general  taxes,  including  many  .in  impost  that  the  average 
American  would  call  a  direct  tax.  According  to  the  present 
American  usage,  "  duties  "  are  restricted  to  customs  duties ; 
but  in  the  Civil  War  the  income  tax  was  officially  called  the 
"income  duty,"  and  in  the  eighteenth  century  the  term  had 
a  still  wider  meaning.  It  is  used  in  the  debates  on  the  con- 
stitution to  include  not  alone  stamp  duties,  but  also  other 
internal  duties  or  taxes  on  goods  and  merchandise  which 
elsewhere  would  often  be  called  excises.*  In  a  Pennsylvania 
law  of  1783  the  carriage  tax  is  officially  called  a  "duty, "^ 
and  in  the  federal  internal  revenue  system,  at  the  end  of  the 
eighteenth  century  as  well  as  during  the  War  of  1812,  many 
of  the  internal  taxes  were  called  duties.  A  careful  research 
would  no  doubt  disclose  the  fact  that  its  wider  use  in  the 
English  sense  as  equivalent  to  taxes  was  by  no  means  un- 
common. 

The  word  "impost"  was  ordinarily  used  in  the  sense  of 
"import  duties";  but  it  is  frequently  employed  in  the 
debates  in  the  convention  in  the  sense  of  taxes  on  trade  ;^ 
although  the  still  wider  use  of  imposts,  as  equivalent  to  taxes 
in  general,  seems  to  have  disappeared.  Again,  while  "  excise  " 
is  used  in  the  eighteenth  century  in  the  sense  of  ordinary 
taxes  on  manufactures,  there  was  a  great  diversity  of  custom, 
imposts  on  particular  classes  of  property  being  called  taxes  in 
some  states  and  excises  in  others.*     Finally,  in  the  various 


'  Sec  the  jiassaRe  in  Elliot,  vol.  i,  p.  3f.    .   vul.  ii,  p.  333. 

2  rcnnsylvania,  act  of  July  10,  17S;,.  rha|>.  xii. 

3  r/.,  r.r  instance,  Elliot,  vcl.  v,  pp.  3S-42  and  p.  299.     In  one  place  we  Hnd 
even  the  phrase  "taxes  on  imposts"  ;   ibi,t.,  p.  305. 

*  bee  inpa,  p.  507. 


Tk:  Constitutionality  of  the  luconti  Tax     561 

state  constitutions  that  were  ado|<ted  in  the  eighteenth  cen- 
tury wc  find  a  rather  indiscrinunate  collection  of  terms,  such 
as  power  to  levy  "assessments  rates  and  taxes,"  "  suhsidies, 
charges,  taxes,  imposts  and  duties,"  and  "  taxes,  customs  or 
contributions."  ' 

We  see,  then,  that  there  was  no  settled  usage  anywhere  on 
the  American  continent;  that  the  most  K^'ficic  term,  next  to 
tax,  was  duty ;  and  that  there  was  no  clear  line  of  demarca- 
tion between  a  tax  and  a  duty. 

With  this  general  uncertainty  as  to  the  use  of  the  older 
terms,  it  need  not  surprise  us  to  find  that  there  was  no  agree- 
ment at  all  as  to  the  use  or  meaning  of  the  newer  term, 
"direct  tax."  As  a  matter  of  fact,  the  term  was  scarcely 
employed  at  all  before  1787.  We  have  found  only  one  in- 
stance of  its  use  in  the  United  States  before  that  date,  namely, 
in  a  Massa^^'  u«etts  act  of  1786.  In  the  preamble  of  this  law, 
which  impo  \  an  excise  duty  upon  carriages,*  it  is  stated : 
"  Whereas  every  well-wisher  to  the  peace  and  hajjpiness  of 
this  commonwealth  will  most  cheerfully  acquiesce  in  all  these 
me.isurcs  adopted  by  the  government  which  will  tend  to  es- 
tablish their  public  faith  and  honour;  and  ease  the  peojjle  as 
much  as  possible  of  direct  taxation,  and  to  encourage  the 
agriculture,  manufactures  and  population  of  the  country." 
But  no  clew  is  given  as  to  what  is  meant  by  the  '.erm  "direct 
taxation,"  except  that  it  there  stands  in  opposition  to  an  ex- 
cise upon  carriages,  —  an  interesting  fact  in  view  of  the  con 
sideration  that  at  the  present  time  in  Massachusetts  a  tax  on 
carriages  is  considered  a  part  of  the  general  property  tax. 

Inasmuch  as  this  is  the  only  example  that  has  been  dis- 
covered in  legislation  or  literature  of  the  use  of  the  words 
"  direct  tax,"  what  shall  we  say  of  the  repeated  contention  of 
the  distinguished  coun.sel  in  the  income-tax  case  that  "  at  the 
date  of  the  Constitution,  the  words  'direct  taxes'  and 'in- 
direct taxes*  were  household  words.     They   were  borrowed 

'  See.  i^.,  thr  constitutions  of  Massachusetts,  New  Hampshire,  and  Pennsyl- 
vania. 

-  Act  of  November  15.  I  ;.So. 
2  " 


\% 


IS 


1 


562 


The  Income  Tax 


from  the  literature  and  practice  of  Great  Britain  and  the 
Continent  of  Europe.  They  are  to  be  found  in  the  literature 
of  the  period.  They  had  been  used  in  Europe  as  meaning 
taxes  which  fell  directly  upon  property  and  its  owner,  like  a 
land  tax  or  a  tax  on  incomes.  .  .  .  The  inquiry  now  is, 
whether,  when  adopted  in  this  country,  they  carried  with 
them  the  signification  which  universally  obtained  elsewhere."* 
As  a  matter  of  fact,  it  would  be  difficult  for  almost  any 
one  to  pack  into  such  small  compass  an  equal  number  of 
misstatements.  On  the  contrary,  the  distinction  had  .'carcely 
begun  to  be  made.  The  only  literature  on  the  subject  con- 
sisted of  the  writings-  of  Adam  Smith  and  Turgot.  Adam 
Smith,  as  we  -emember,  had  made  no  clear-cut  distinction ; 
all  that  he  intimr'cd  was  that  indirect  taxes  were  taxes  on 
expenditure,  and  even  here,  as  we  know,  he  was  not  at  all  in 
agreement  with  the  later  writers,  who  distinguish  between 
direct  and  indirect  ta.xes  on  expenditure.  The  other  alleged 
authority  is  Turgot.  Turgot  had  given  the  usual  Physio- 
cratic  explanation  in  a  small  memoir  that  was  written  in 
1764;  but  it  was  very  unlikely  that  this  was  known  in  the 
United  States,  as  it  had  never  even  been  published  in 
France,  much  less  translated  in  the  United  States."     More- 


1,4; 


'  Argument  of  Mr.  Stward  in  the  Income  Tax  Cases.  1895,  pp.  18,  19. 
This  argument  is  summarized  in  157  U.S.,  452.  See  esp.  p.  455.  The  state- 
ments are  repeated  by  the  other  counsel  and  accepted  by  the  court. 

'^  Mr.  Sewi.  .1,  in  his  argument  in  the  Income  Tax  cases,  stated  that  Turgot  pub- 
lished in  1764  a  work  on  taxation,  and  that  in  the  .tmertCin  .Museum  for  Jan- 
uary, 1787,  "this  work  is  qiiote<l,  as  showing  that  it  was  then  in  circulation  in 
America."  —  Seward's  .Argument,  op.  cit.,  p.  17.  Almost  every  statement  in 
this  passage  is  erroneous.  In  the  lirst  place,  the  production  of  Turgot  in  question 
was  not  a  "  work,"  but  a  simple  memorandum  ;  in  the  second  place,  it  had  never 
been  published  in  France.  In  the  third  place,  the  reference  in  the  American 
.Museum  is  not  to  this  production  of  Turgot,  nor  to  any  matter  connected  in  the 
remrtcst  ilegree  with  <lirect  or  indirect  taxation.  It  is  a  general  i|uotation  refer- 
ring; to  his  political  ideas,  in  which,  indeed,  the  word  "  taxes  "  happens  to  be 
mentioned.  Hut  that  is  the  nearest  approach  to  Mr.  Seward's  amazing  misstate- 
ment. .See  the  American  .l/«ic«OT,  January,  1787,  p.  16.  .Xs  a  matter  of  fact, 
the  only  economic  writings  of  Turgot  which  were  published  during  his  lifetime, 
or  for  that  matter  during  the  eighteenth  century,  were  two  articles  entitt  'd  foires 
el   Maiihis  axn\  FonJatioiis,    in  the  EncyclophHe  in   1756;  the  translation  of 


\v^. 


The  Constitutionality  of  tlu  Income  Tax     563 

over,  the  classification  given  by  Turgot  does  not  at  all  carry 
out  the  contentions  of  the  counsel  in  the  income-tax  cases. 
Turgot,  we  remember,  spoke  of  a  direct  tax  as  being  one  siir 
les  fonds.  The  counsel  in  the  income-tax  case  innocently 
translated  this  as  "a  tax  on  the  funds,"  thus  hoping  to  bolster 
up  their  contention  that  according  to  Turgot  a  tax  on  per- 
sonal property  was  also  a  direct  tax.  Of  co\\x%&  fonds  or  bicn 
foiids  means  lands,  not  funds,  and  Turgot's  contention  was 
that  the  only  direct  tax  was  a  tax  on  lands  —  just  the  opposite 
of  what  the  counsel  thought  it  meant.  If  the  coun.=cl,  how- 
ever, had  gone  a  little  farther  and  stated  the  fuller  and  sub- 
sequent classification  made  by  Turgot,  they  would  have 
found  small  comfort  in  their  conclusion  that  Turgot's  idea  of 
direct  tax  included  an  income  tax.     The  only  country  in  the 

Tucker's  Important  Questions  on  Trade  in  1755;  ami  the  Keftcctions  on  the 
Formation  of  the  Distribution  of  IVealth,  which  appeared  in  the  ^piumiriJes  du 
Citoyen  in  1767.  In  none  of  these  works  is  there  the  slightest  reference  to  taN- 
ation.  All  of  Turgot's  writings  on  taxation  consisteil  of  official  memoirs  preserved 
in  manuscript  in  the  French  archives,  until  they  were  published  by  Uu  I'ont  de 
Nemours  in  1809. 

This  glaring  misstatement  of  Mr.  Seward  has  been  widely  copied.  So  Mr. 
Morrow  says :  "  They  [the  counsel]  went  to  the  extent  of  showing  thixt  a  work  on 
taxation  written  by  Turgot,  with  a  certain  detinition  of '  direct  taxes  '  was  in  .\merica 
in  1787  an<l  therefore  might  have  been  consulted  by  the  framers  of  the  Constitu- 
tion."—  Dwight  W.  Morrow,  "The  Income  Tax  Amendment,''  in  Columbia  /.aw 
/ie^'ieiv,  vol.  x  (1910),  p.  407. 

It  was  perhaps  Mr.  Seward  who  is  responsible  for  the  passage  in  Mr.  (iuthrie's 
argument  in  the  income  tax  cases:  "Were  the  members  of  the  Convention  likely 
to  use  terms  they  did  not  understand:  Had  they  never  seen  the  term  'direct 
tax'  Ite'ore  ;  and  if  so,  where  ?  In  the  books  that  were  in  every  man's  hand. 
Many  had  studied  Turgot  in  the  original  or  in  translations  of  particular  pass.ig/;s 
and  they  knew  his  clear  delinition  of  ' Us  impots  directs.'  "  —  Opening  .Irgiiment 
by  li'.  D.  Guthrie, on  behalf  of  Appellints  in  the  Income  Tax  Cases.  l8iJ5,  p.  7. 
Equally  unfounded  is  Mr.  Guthrie's  st.itement  that  "  Turgot  to-day  is  still  the  great 
work  put  in  the  hands  of  French  students  of  the  Science  of  Finance  and  (iovern- 
ment."  We  should  be  glad  to  learn  to  which  "  work  of  Turgot "  Mr.  Cuthrie 
refers. 

All  this  would  not  have  been  so  deplorable  had  it  not  been  blindly  accepted 
by  the  court.  C  hief  Justice  Fuller  calls  spicial  attention  to  the  fact  thit  "  Turgot 
had  published  in  1764  his  work  on  taxation,  and  in  1766  his  esiay  c)n  'The 
Formation  and  Distribution  of  Wealth.  '  "  Unfortunately,  the  tirs:  statement  is 
incorrect;  and  the  second  utterly  devoid  vA  the  signilicance  attached  to  it. 


I 


1: 


564 


The  Income  Tax 


world  which  at  that  time  possessed  a  general  income  tax  was 
France,  and  it  so  happened  that  the  income  tax  was  known 
under  the  name  of  "  capitation."  *  In  this  other  and  fuller 
passage,  written  several  years  later,  Turgot  distinctly  states 
that  if  the  capitation  comprises  what  are  called  all  forms  of 
faculty,  industry,  commerce,  wages  or  profits,  the  tax  is  an 
indirect  tax.*  According  to  Turgot,  an  income  tax  is  an  in- 
direct tax. 

So  far,  therefore,  as  any  of  the  framcrs  of  the  constitution 
may  have  been  acquainted  with  the  views  of  Turgot  and 
accepted  them,  their  understanding  of  a  direct  tax  must  have 
been  entirely  different  from  that  of  Adam  Smith.  We  are 
forced  to  confess  ihat  for  the  counsel  to  jumble  together 
such  conflicting  views  and  for  the  court  to  follow  them, 
does  not  reflect  the  greatest  credit  on  their  economic  acumen, 
their  historical  learning  or  their  knowledge  of  finance. 

If,  then,  we  proceed  to  discuss  the  sense  in  which  the 
framers  of  the  constitution  use  the  term,  we  must  abstract 
entirely  from  Adam  Smith  and  Turgot,  with  their  completely 
contradictory  opinions,  and  seek  to  ascertain  what  the  mem- 
bers themselves  thought. 


S  7.    The  Use  of  the  Term  in  the  Constitiitioual  Convention 

The  words  "direct  taxes"  and  "indirect  taxes"  were  used 
only  a  very  few  times  in  tlie  convention.  In  some  cases  there 
is  no  doubt  that  the  phrase  refers  to  the  mode  of  assessment. 
The  old  plan  of  supporting  the  general  government  was  by  a 
system  of  requisitions  on  the  states.  The  now  method  was 
to  be  that  of  direct  action  of  the  federal  government  upon  the 
individual.  Direct  ta.xes  would  therefore  simi)ly  mean  taxes 
imposed  not  by  the  states,  but   by  the  federal  government 

'  S'e  supra,  p.   50. 

^  See  the  passage  i|U()ted  above,  p.  5-!6.  It  may  l)o  ad.Icd  that  these 
passa(,'cs  from  I'urKot  wore  supplied  by  the  present  writer  to  the  oppusinf; 
counsel  in  the  income  tax  cases,  but  the  second  passage  was  handed  in  by  tlie 
i:..vernmer.t  counsel  too  late  to  prod;:rr  anv  ,-ffrrt  in  Mw.  .-..u-^-  of  the  af-'ii:lient. 


if 


The  Constih.  Uonality  of  the  Income   Tax     565 


upon  the  individual.  Thus,  for  instance,  on  July  13,  1787, 
Gerry  moved  that  "  all  moneys  to  be  raised  for  supplying  the 
public  treasury  by  direct  taxation  shall  be  assessed  on  the 
inhabitants  of  the  several  states  according  to  the  number  of 
their  representatives."  When  this  motion  was  lost,  Gerry 
stated  that  he  had  ascertained  that  the  failure  "  had  pro- 
ceeded from  an  objection,  with  some,  to  the  proposed  assess- 
ment of  direct  taxes  on  the  inhabitants  of  the  states."  He 
thereupon  varied  his  motion,  so  "as  to  authorize  the  assess-. 
ment  on  the  states,  which  leaves  the  mode  to  the  legislature" ; 
and  he  accordingly  put  his  motion  in  the  form  that  "  all 
moneys  for  supplying  the  public  treasury  by  direct  taxation 
shall  be  raised  from  the  several  states,  according  to  the  num- 
ber of  their  representatives."  The  motion,  so  amended,  was 
accepted.'  Again,  on  August  21,  when  the  matter  was  taken 
up  by  Martin,  he  stated  that  "  direct  taxation  should  not  be 
used  but  in  cases  of  absolute  necessity ,  and  then  the  states 
will  be  the  best  judges  of  the  mode.""  In  tb'-  debates  in  the 
separate  states  also  we  find  this  use  of  term,  as,   for 

instance,  by  Dana  in  Massachusetts,  and  by  Randolph  in 
Virginia. 3  It  is,  however,  a  well  established  fact  that  in 
some  of  the  states,  like  New  York,  where  state  taxes  were 
apportioned  to  the  counties  instead  of  being  levied  upon  the 
individuals  as  such,  this  method  was  termed  "  indirect  taxa- 
tion," and  the  words  "direct  ta.xes"  were  limited  to  ta.vcs  di- 
rectly levied  upon  the  uidividual.  So  that  the  term  denoted 
in  some  states  just  the  opposite  of  what  it  denoted  in  others. 
In  a  number  of  other  cases,  however,  the  term  "direct 
ta.xes'  was  used  in  the  convention,  irrespe>..ive  of  the 
question  whether  the  tax  was  to  be  levied  on  the  state  or 
other  political  body,  or  on  the  individual.  Thus  the  term 
"direct  tax"  was  employed  in  some  cases  as  opposed  to 
"  taxes  in  trade,"*  and  in  other  cases  as  opposed  to  "  exports, 
imports  and  excises";^  and  both  there,  as  well  as  in  the  case 

vol.  iii,  p.  122. 


1  FlUd.  V..1.  V,  pp.  306-307. 
■■=  IhU.,  p.  45J. 

*  IN  it.  v.. 

•  ''.  I'-  43 
.  V,  p.  320 

'•>  1 

hi./.,  ' 

1.    ;o ;. 

:¥ 


i? 


■1] 


I  if. 


ft; 


566 


The  Income  Tax 


of  the  phrase  "  no  capitation   or  direct   tax,"  the    term  evi- 
dently refers  to  a  particular  category  of  taxes. 

When  we  consider  the  use  of   the  term  "  direct  tax  "  in 

the  different   legislatures  that  ratified  the  constitution,  we 

find  no  less   than  five  different  uses  of  the   term.     In  the 

first  place,  as  just  explained,  it  is  sometimes  used  to  signify 

a  tax  on  the  states.    Secondly,  it  is  employed  to  mean  only  a 

land  tax.i     Thirdly,  it  is  used  to  signify  a  land  and  a  poll 

.  tax.2     Fourthly,  it  is  employed  to  mean  a  poll  tax,  together 

with  a  general  assessment  on  property.*     In  the  fifth  place, 

it  is  used  in  the  sense  of  a  tax  on  land,  together  with  the 

specific  articles  of  personal  property.      Thus  Livingston,  in 

New  York,  said.  "  They  must  have  recourse  to  direct  taxes, 

that  is,  taxes  on  land  and  specific  duties  "  ;*  and  Jay,  of  New 

York,  stated  that  "  It  ought  to  be  considered  that  direct  tax .  .^ 

are  of  two  kinds  — general  and  specific"  — and  he  instanced, 

as  an  example  of   the  latter,  a  tax  on  coaches.^     So  also 

Marshall,  in  Virginia,  said :  "  The  objects  of  direct  taxes  are 

well  understood;  they  are  but  few;  what  are  they.?     Lands, 

slaves,  stock  of  all  kinds,  and  a  few  other  articles  of  domestic 

property."^ 

The  only  conclusion  from  the  above  survey  is  that  almost 
every  speaker  used  the  term  "direct  ta.xes "  in  a  different 
way.  It  is  particularly  to  be  noticed  that  the  very  tax  which 
was  afterwards  to  form  the  subject  of  the  first  decision  of  the 

•  Cf.  thf  speech  of  Dana  in  the  Massachusetts  convention,  Elliot,  vol.  ii,  p.  42. 

*  Cf.  the  speech  of  Mason  in  the  Virginia  convention,  Elliot,  vol.  iii,  p.  264! 
«  tf.  the  s|)eech  of  Williams  in  the  Massachusetts  convention,  Elliot,  vol.  iii, 

P-  330.  "Under  this  clause  may  ;,e  impose.l  a  -oil  tax,  a  tax  on  houses,  and 
buildings,  on  windows  and  fireplaces,  on  canie,  and  on  all  kinds  of  personal 
property."  See  also  the  speech  of  Spencer,  in  the  North  Carolina  convention.  — 
Elhot,  vol.  iv.  p.  76:  ••  How  are  direct  taxes  to  be  laid  ?  I'.y  a  p..ll  tax.  assess- 
ment on  land  or  other  properly?"  See  also  Monroe  in  Virginia,  who  says; 
"  What  are  the  objects  of  direct  taxation?  Will  the  tuxes  he  laid  on  land? 
Will  the  taxe.  be  laid  on  polls  only  ?  .  .  .  How  then  will  it  be  laid  ?  On  all 
property  ?"—  y,  //,,/,  vol.  iii,  pp.  215-216. 

■*  Elliot,  vol.  ii,  p.  341. 

«  Ibid.,  p.  381.     (/  the  statement  of  Smith,  ibid.,  p.  393. 

'  Ibid.,  vol.  iii,  p.  ;io, 


The  Constitutionality  of  t/u  Income  Tax     567 

Supreme  Court,  namely,  the  carriage  tax,  which  existed  both 
in  Virginia  and  in  Massachusetts,  was  in  1787  called  a  direct 
tax  in  Virginia,  where  it  was  comprised  among  the  other  arti- 
cles of  property  mentioned  by  Marshall,  and  yet  was  at  the 
same  time,  in  Massachusetts,  as  we  have  seen  above,  officially 
called  an  excise,  and  especially  distinguished  from  the  direct 
taxes. 

Nor  is  any  further  light  thrown  upon  the  subject  by  the 
use  of  the  term  "indirect  taxes."  In  the  debates  in  the  con- 
vention we  find  in  one  place  the  term  "indirect  taxes"  used 
by  King  simply  in  opposition  to  the  old  land  tax  of  the  con- 
federation.' In  another  plice  Gouveneur  Morris  opposes 
direct  taxation  to  indirect  taxes  on  exports  and  imports,  and 
on  consumption.*  This  was,  however,  not  an  exclusive  defini- 
tion, because  it  allows  no  room  for  such  taxes  as  stamp  duties, 
which  are  certainly  not  taxes  on  exports  or  imports  or  on  con- 
sumption, and  which  at  the  same  time  presumably  would  not 
have  been  called  direct  ta.xes  by  Morris.  Finally,  in  the  Con- 
necticut convention,  Elsworth  used  "  indirect  taxation "  in 
the  sense  of  taxes  on  consumption,  but  he  did  not  indicate 
what  constituted  direct  taxation.* 

'  Elliot,  vol.  V,  p.  312.  2  /iiJ,^  p.    :j02. 

'  "  Oirect  taxation  can  go  but  little  way  towards  raising  a  revenue.  To  raise 
money  in  this  way,  people  must  be  provi  lent  ;  they  must  constantly  be  laying 
up  money  to  answer  the  demands  of  the  collector.  liut  you  cannot  make  people 
thus  provident.  If  you  would  do  ai  thinj;  to  the  purpose,  you  must  c<ime  in 
when  they  are  spending,  and  taUe  a  part  with  them.  Tliis  does  not  take  away  the 
tools  of  a  man's  business,  or  the  necessar;'  utensils  of  his  family;  it  oidy  comes 
in  when  he  is  taking;  his  jileasure,  and  feels  generous.  ...  1  will  instance  tivo 
facts  which  show  how  easily  and  insensilily  a  reveime  is  raised  by  indirect  taxa- 
tion. ...  In  l-'.ngland  and  Midland  pmciigious  taxes  .  .  .  are  levied  cliiedy 
upon  articles  of  consumption." —  Elliot,  vol,  ii,  pp.  lyl-192. 

In  a  brief  submitted  :n  the  income  tax  tises  of  1895  this  <|uotation  from  F.ls- 
worth  is  followed  by  the  inter|>olation  of  counsel,  "This  was  the  income  tax  pure 
and  simple, and  limuglit  within  the  phrase  '  ilirect  t.ixation.'''  —  E.Mtr.icti  from  the 
E^'iilftiie  f'rorifi^  the  llistorit-  E'lits  .  .  .  ''r-iriti^  uf^on  tin-  ,/itt'stioii  ichelher  the 
word:  'Direct  7'ii.x'  .  .  .  einhrate  a  Tii.x  upon  Iiwomef,  rl'\,  p.  42.  As  the 
income  tax  was  not  in  existence  at  this  time  in  (_'onnecticut  or  anywhere  else,  the 
pertinency  of  the  interpolation  is  not  obvious.  Hut  perhaps  it  served  its  purpose 
in  impressing  the  court. 


7,^ 


568 


Tlu  Income  Tax 


TIic  above  are  the  only  references  in  the  debates  to  the 
terms  "direct  taxes"  or  "  indirect  taxes."  It  is  clear  that,  far 
from  havinjj;  any  settled  meanin-j;,  the  terms  were  employed 
by  each  speaker  in  a  different  sense.  It  must  therefore  not 
surprise  us  to  learn  that  when  the  cl.:use  in  question  came 
before  the  convention  for  final  action,  on  August  20,  and  when 
Mr.  Kins  asked,  "what  was  the  jirecise  meaning  of  dirtct 
taxation,"  we  are  told,  in  the  significant  words  of  Madi.son, 
that  "no  one  answced." '  No  one  answered,  because  no  one 
could  answer.  Yet  the  j)hrase  was  allowed  to  remain  becau.se 
it  had  served  the  invaluable  purpose  of  effecting  the  great 
compromise. 

The  same  uncertainty  continued  for  another  decade.  A 
few  years  later  the  llylton  case  arose  and  was  argued  by 
Hamilton  and  decided  by  judges,  all  of  whom  had  taken  a 
distinguished  part  in  the  deliberations  of  either  the  constitu- 
tional or  state  ratifying  conventions.  Hamilton  tells  us,  in 
his  brief :  "  What  is  the  distinction  between  direct  and  indirect 
taxes.'  It  is  a  matter  of  regret  that  terms  so  uncertain  and 
vague  in  so  important  a  point  are  to  be  found  in  the  Constitu- 
tion. We  shall  seek  in  vain  any  antecedent,  settled  legal 
meaning  to  the  respective  terms — there  is  none."  Of  the 
judges  who  docided  the  case,  only  one  was  positive,  another 
simply  "thought,"  while  a  tliird  was  doubtful  as  to  the  general 
meaning  of  the  term.  Justice  Chase  said,  "  I  am  inclined  to 
think,  but  of  this  I  do  not  give  a  judicial  opinion,  that  the 
direct  taxes  contemplated  by  the  Constitution  are  only  two, 
to  wit:  a  capitation  or  poll  tax,  simply,  without  regard  to 
property,  professioi;  or  any  other  circumstance,  and  a  tax  on 
land."  Justice  Iredell  said,  "  Perhaps  a  direct  tax  in  the 
sense  of  the  Constitution  can  mean  nothing  but  a  tax  on  some- 
thing inseparably  annexed  to  the  soil."  While  Justice  Paterson 
said,  "  I  never  entertained  a  doubt  that  the  principal,  I  will 
not  say  the  only,  objects  that  the  framers  of  the  Constitution 
contemplated  as  falling  within  the  rule  of  apportionment  were 
a  capita. !on  tax  and  a  tax  on  la  u."  Yet  at  the  same  time 
»  i.iiio/t,  vol.  V,  p.  451. 


TV/i'  Constitutionality  of  the  Income   Tax     569 

Albert  Gallatin,  who  confessed  that  the  words  had  no  "  ^;cp.eral 
acceptation  or  technical  meanings"  and  who  thoii^hl  it  very 
important  that  a  fixed  interpretation  he  given  to  the  terms 
"for  the  sake  of  preventing  future  controversies,  which  may 
be  not  more  fatal  to  the  revenue  than  to  the  tranquillity  ot 
the  union,"  suggested  that  Adam  Smith's  distinction  be  ob 
served,  and  that  accordingly  "the  most  generally  received 
opinion  is  that  by  direct  taxes  in  the  Constitution,  those  are 
meant  which  are  raised  on  the  cajiital  or  revenue  of  the 
people;  by  indirect  such  as  are  raised  on  their  expense."' 
Parenthetically  remarked,  it  may  be  stated  that  (ialiatin,  like 
Morris  quoted  above,  would  have  found  great  difficulty  m 
deciding  whether,  under  this  definition,  stamp  duties  were 
direct  or  indirect. 

Amid  this  diversity  of  opinion  only  one  thing  is  sure, 
namely,  that  no  one  knew  exactly  what  was  meant  by  a  direct 
tax,  because  no  two  people  agreed.  What,  then,  shall  wc  say 
of  the  statement  of  the  counsel  which  was  accei>ted  and  re- 
peated by  the  court  in  the  first  Pollock  decision  that  "  the 
distinction  between  direct  and  indirect  taxation  was  well 
understood  by  the  framers  of  the  Constitution,  and  those  who 
adopted  it."  This  is  just  the  reverse  of  the  truth.  The  e.xact 
distinction  between  direct  and  indirect  taxation,  such  as  is 
necf-ssary  for  purposes  of  precise  classification,  was  beyond 
peradventure  of  doubt  not  understood  by  the  framers  of  the 
Constitution  and  those  who  adopted  \K?     All  that  can  be  said  is 

1  A  Sketch  ofllu  Ftnamts  of  the  Cnit,d  St.ites,  l.y  All.ert  (iallaiin,  Ncu  V.-rk. 

1796,  p.  II. 

-  Mr.  Samuel  11.  Clarke  thinks  that  h-  has  .hscvcre  1  the-  rr.-  ise  mfanu;^  "I 
the  term.  .\ccor.imK  to  him,  the  cunstuutional  ttst  is  this,;  ".,,Krati  .n  -i  ibt 
tax  statute  through  the  meilium  of  the-  wills  of  the  ,.crs  -ns  upon  ,-l  ui..  the  iiab.lity 
to  be  liq.nve.lnf  property  or  property  rcs.,urces  i.  iini"'Se.t.  m  the  M.alUr  ■  f  the 
total  amount  of  the  l,al„l,tv If  vou  hn^  that  ^^hat.•^cr  ^.  u  ■!-.  ■  r  rr.ram 


from  ■ 


uinj;,  youare  aff'-tti'l  with  the  snme  unvarvin;;  am  )U! 


llof  li 


dircLt;   hut  if  you  hn.l  that  the  amount  varies  as  vuurcon  luct  var' 

—  Samuel    U.  Clarke,  ,l/r'W("-.'«./«"»   "  I'"   ''''•■"'   Jfitri'^d  a^ 

Constitution  of  the  Unit''.  St„l/r.     Ne«   York.  loio.  i;..  '-'-'^'• 


u  -V 

bilitv.  the  tan  is 

-,  it  i>  in'iirf.'.." 

I)ir,:t"  in  :'.e 
i  /.  alv. '  /.(•//•  r, 
I  ■n  >;lnitvn  .  ' 


the  I'ltile.i  St.itei.     .New  York,  lyio. 


I  p|,. 


1'.  m. 


b 


N!r 


'w 


Ifl 


4; 


570 


The  Income  Tax 


that,  in  a  general  way,  import  and  export  duties  were  considered 
indirect  taxes,  and  that  land  and  poll  taxes  were  considered 
direct  taxes;  but  farther  than  that  it  is  impossible  to  go. 
Even  certain  ta.\  s  on  specific  articles  of  property  which  would 
to-day  generally  be  considered  direct  taxes,  were,  as  we  have 
seen,  variously  called  in  the  different  states  direct  taxes,  or 
duties,  or  excises,  the  two  latter  terms  being  employed  in 
contradistinction  to  direct  taxes. 

The  question,  therefore,  as  to  whether  the  term  'direct 
taxes,'  as  used  in  the  constitution,  included  in  the  minds  of 
the  framers  an  income  tax,  is  impossible  of  solution,  first  and 
foremost  because  of  the  fact  that  income  taxes  did  not  at  that 
time  exist,  either  in  England  or  in  the  United  States.  Of 
two  very  significant  facts,  however,  we  may  be  certain.  The 
first  is  that  the  only  tax  at  all  akin  to  the  income  tax  existed 
in  a  few  of  the  northern  colonics,  under  the  name  of  the 
"  faculty  tax."  As  to  these  taxes,  however,  we  have  the  dis- 
tinct statement  of  Secretary  Wolcott,  which  has  been  quoted 
above  in  another  connection,^  that  they  were  not  meant  to 
be  included  under  the  term  "direct  taxes."  Secondly,  the 
income  tax  as  such  existed  at  the  time  in  only  one  country  of 
the  world,  namely,  France.  But  according  to  the  classifica- 
tion of  ta.xes  made  by  Turgot,  which  the  counsel  and  the 
court  believe  to  have  been  as  familiar  as  household  words  to 
the  American  people,  the  income  tax  is  specifically  declared 
to  be  an  indirect  tax.  If,  therefore,  any  inference  at  all  were 
to  be  drawn  from  these  facts,  it  would  be  that  the  framers  of 
the  constitution  specifically  desired  to  exclude  income  or  fac- 
ulty ta.\es  from  the  category  of  direct  taxation.  But  such  an 
inference  would  really  be  unwarranted,  first,  because  in  all 
probability  no  one  thought  of  the  "faculty  tax";  and  secondly, 
because  without  much  doubt  almost  no  one  knew  anything 
about  Turgot  or  the  French  capitation. 

The  only   safe   conclusion  from   this  whole  discussion  is 

aarke  wouM,  according  to  his  definition,  justify  the  decision  of  the  Supreme 
CVort  th-,t  an  !rjherit;tni.e  lux  is  indirect. 
1  Supra,  p.  386. 


The  Constitutionality  of  tlu  Income   Tax     571 

that  it  is  utterly  useless  to  speculate  what  the  founders 
of  the  constitution  would  have  thought  of  the  income 
tax.  They  dealt  only  with  the  taxes  with  which  they  were 
familiar,  and  they  could  not  possibly  have  attempted  to  put 
into  the  category  of  direct  taxes  imposts  which  did  not  yet 
within  their  knowledge  exist.  Neither  a  tax  on  corporations, 
nor  a  tax  on  successions,  nor  a  tax  on  inheritances,  nor  a  tax 
on  incomes,  was  in  exi.stence.  With  none  of  these  were  the 
framers  of  the  constitution  familiar.  It  is  therefore  idle, 
from  a  scientific  point  of  view,  to  speculate  into  which 
category  they  might  have  put  these  taxes  if  they  had  existed. 
When  these  taxes  did  actually  develop,  however,  it  became 
necessary  for  the  Supreme  Court  to  take  some  position 
on  the  question,  and  in  the  decision  of  each  question  the 
court,  as  may  easily  be  shown,  was  swayed  at  bottom  by 
considerations  of  political  exigency  and  opportunism.  To 
these  decisions  we  must  now  turn  our  attention. 


'  \ 


§  8.    The  Earlier  Decisions  of  titc  Supreme  Court 

In  1794  the  United  States  government  levied  a  tax  on  car- 
riages "for  the  convenience  of  persons  which  shall  be  kept  by 
or  for  any  person  for  his  or  her  own  use,  or  to  be  let  out  for 
hire,  or  for  the  conveying  of  passengers."     The  constitution- 
ality of  this  tax  was  attacked  by  the  political  opponents  of 
Hamilton,  during  the  discussion  of  the  bill,  anu  when  the  case 
finally  came   before  the  Supreme   Court,  Hamilton  was  no 
longer  Secretary  of  the  Treasury  to  argue  in  its  favor.     This 
tax  happened  to  be  one  which,  as  we  have  seen,  not  only 
existed,  but  was  treated  differently  in  several  .states.     It  so 
happened  that  the  chief  opponents  of  Hamilton  at  the  time 
came  from  the  South,  where  t..  -  carriage  tax  was  considered 
a  tax  on  specific  property,  whereas  in  some  of  the  northern 
.states,  as  we  have  seen,  it  was  called  a  duty  or  an  excise  tax, 
in  contradistinction  to  a  direct  tax.     The  tax,  moreover,  illus- 
trates the  difficulty  of  any  precise  classification  because,  from 
the  very  terms  "f  the  law,  as  recited  above,  it  might  be  con- 


m 


j^ 


57« 


The  Income  Tax 


sidered  a  tax  on  consumption  (when  the  carriage  was  used  by 
the  owner)  or,  on  the  other  hand,  a  tax  on  earnings  or  on  prop, 
erty  used  for  productive  purposes,  as  in  the  case  of  carriages 
let  out  for  hire.  The  case  came  up  in  1796,  and  was  argued 
before  a  court,  every  member  of  which  had  taken  a  prominent 
part  in  the  constitutional  convention  or  in  the  state  ratifying 
conventions,  and  who  therefore  might  be  presumed  to  have 
understood  what  the  convention  really  intended  to  enact. 
All  that  is  left  of  the  argument,  however,  is  a  fragment  of 
Hamilton's  brief. 

Hamilton   showed   that    there    was   no   well-settled   legal 
meaning  attached  to  the  term,  and  also  called  attention  to 
the  unsatisfactory  et  onomic  usage  based  on  the  criterion  of 
shiftability.     He  adverted  to  the  I'hysiocratic  distinction,  but 
contended  that  obviously  the  term  "direct  taxes  "  meant  more 
than  merely  the  I'hysiocratic  land  tax,  because  the  constitu- 
tion specifically  speaks  of   a  capitation  tax  as  a  direct  tax. 
Hamilton  then  went  on  to  say  :  "  »ut  how  is  the  meaning  of 
the  Constitution  to  h.-  determined  .'     It  has  been  aflRrmed,  and 
so  it  will  be  found,  that  there  is  no  general  jirinciple  which 
can  indicate  the  boundary  between  the  two.     The  boundary, 
then,  must  be  fixed  by  a  species  of  arbitration,  and  ought  to 
be  such  as  will  involve  neither  absurdity  nor  inconvenience." 
Hamilton  therefore  continued  :  "  The  following  are  presumed 
to  be  the  only  direct  taxes  :  capitation  or  poll  taxes ;  taxes 
on   lands  and    buildings;    general   assessments,    whether   on 
the    whole    property  of   individuals,  or  on  their  whole  real 
or   personal    estate.      All   else   must   of   necessity    be   con- 
sidered  as   indirect  taxes."     Yet    as  Hamilton  himself  had 
previously  stated  in  referring  to  the  absence  of  any  settled 
meaning  of  the  respective  terms,    "  We  shall  be  as  much  at 
a  loss  to  find    any  disposition  of  either  which  can  satisfac- 
torily determine  the  point."     He  concluded  that,  on  the  ba.sis 
of  his  suggestion,  a  carriage  tax  must  be  declared  to  be  indirect. 
The  judges  unanimously  agreed  with   him.     Justice  Chase 
put  his  decision  on  the  following  ground  :  "The  Constitution 
evidently  contemplated  no  ta.xes  as  direct  taxes,  but  on!"  such 


The  Constitutionality  of  the  Income   Tax     573 

as  Congress  could  lay  in  projjortion  to  the  iciisiis.     The  rule 
of  apportionment  is  only  to  be  adopted  in  such  cases  where 
it  can  reasonably  apply,  and  the  subject  taxed  must  ever  de- 
termine the  api)lication  ot  the  rule.     If  i'  is  proposed  to  tax 
any  specitic  article  by  the  rule  of  apportionment,  and  it  would 
evidently  create  great  inecpiality  and  injustice,  it  is  uurcas<.u- 
able  to  say  that  the  Constitution  intended  such  tax  should  be 
laid  by  that  rule."  '     Justice  I'aterson  based  his  decision  upon 
somewhat  similar  grounds.     "  The  Constitution,"  he  stated, 
"has  been  considered  as  an  accommodating  system  ;  it  was  the 
effect  of  mutual  sacrifices  and  concessions;  it  was  the  wi>rk 
of  compromise.     The  rule  of  api>ortionnient  is  of  this  nature  ; 
it  is  radically  wrong;  it  cannot  be  supixtrted  by    any  solid 
reaso'iing.    Why  should  slaves,  who  are  a  species  of  prdjjerty. 
be  represented  more  than  other  property  .'     The  rule,  there- 
fore, ought  not  to  be  extended  by  construction."     So  again 
Justice  Iredell  said  :  "  As  all  direct  taxes  must  be  apiiortioned, 
it  is  evident  that  the  Constitution  contemplated  none  as  direct, 
but  such  as  could  be  apportioned.     If  this  cannot  be  ai>por- 
tioned,  it  is,  therefore,  not  a  direct  tax  in  the  sense  of  the 
Constitution.     That  this  tax  cannot  be  apportioned  is  evident. 
Such    an   arbitrary    method    of    taxing    different    States  dif- 
ferently .  .  .  would  lead  if  practiced,  to  such  dangerous  con- 
sequences, that  it  will   reiiuire  very  powerful  arguments  to 
show  that  that  method  of  taxing  would  be  in  any  manner 
compatible  with  the  Constitution." 

It  is  evident  from  these  quotations  that  the  judges  desired 
to  uphold  the  internal  revenue  sy.stem  of  Hamilton,  and  that 
they  called  the  carriage  tax  indirect  because  this  afforded 
the  only  possible  method  of  permitting  its  continuance. 

The  ne.xt  case  did  not  arise  until  many  years  later.  From 
now  on  the  question  was  not  as  to  the  constitutionality  of  taxes 
which  had  been  known  at  the  time  of  the  framing  of  the  con- 
stitution, but  of  taxes  which  did  not  exist  at  all  at  that  i)eriod. 

In  1868  the  question  arose  as  to  the  constitutionality  of  the 
Civil  War  income  tax,  or  more  specifically,  as  to  the  legality  of 

I  IMi.m  7'f.  irnited  States.  ;  Dall.is,  1 71. 


574 


The  Income  Tax 


the  act  of  1866  imposing  taxes  on  the  incomes  of  insurance 
companies.     This  was  the  case  of  I'acific  Insurance  Company 
vs.  Souli  '     The  court,  however,  held  that  the  tax  was  an  in- 
direct tax  and  therefore  constitutional,  basing  their  conclu- 
sion on  the  following   grounds  :  "  The  consequences  which 
would  follow  the  apportionment  of  the  tax  in  question  among 
the  States  and  Territories  of  the  Union,  in  the  manner  pre- 
scribed by  the  Constitution,  must  not  be  overlooked.     They 
are   very  obvious.     Where  such  corp.       ions  are  numerous 
and  rich,  it  nught  be  light ;  where  none  exist,  it  could  not  be 
collected  ;  where  they  are  few  and  poor,  it  would  fall  ui)on 
them  with  such  weight  as  to  involve  annihilation.     It  cannot 
be  supposed  that  the  framers  of  the  Constitution  intended  that 
any  tax  should  be  apportioned,  the  collection  of  ..hich  on  that 
principle  would  be  attended  with  such  results.     The  conse- 
quences are  fatal  to  the  proposition.     To  the  question  under 
consideration  it  nuist  be  answered  that  the  tax  to  which  it  re- 
lates is  not  a  direct  tax,  but  a  duty  or  excise."     Here,  again,  it 
will  be  seen  that  the  income  tax  was  declan-d  to  be  an  indirect 
tax  because  to  declare  it  anything  else  would  either  render  the 
tax  impossible,  or  involve  annihilation  to  individual  interests. 
The  next  case  was  that  of  Veazie  Hank  vs.  Fenno.  where 
the  question  arose  as  to  the  consniuti.  •  .:,ity  01  ihe  federal 
tax  on   state  bank-notes.      Chief   Justice  Chase   stated   the 
opinion  of  the  court  as   follows:    ".Much  diversity  of  opin- 
ion has  always  prevailed  upon  the  question  what  are  direct 
taxes  .'     Attempts  to  answer   it  by  reference  to  the  defini- 
tions of  political  economists  have  been  frequently  made,  but 
without  satisfactory  results."     He  maintained  that  "it  may 
be   rightly    affirmed    that  the    peculiar    construction    of 

the  Constitution  by  Congress  direct  taxes  have  been  limited 
to  taxes  on  land  and  appurtenances,  and  taxes  on  polls,  or 
capitation  ta.xes,"  After  quoting  the  insurance  company 
case  he  concluded  that  "  the  tax  under  consideration  is  a  tax 
on  bank  circulation,  and  may  very  well  be  classed  under  the 
head  of  duties.     Certainly  it  is  not,  in   the  sense  of  the  Con- 

*  7  Wallace,  433. 


The  Comtitutionalily  of  the  /iiconu    V'tix     575 

stitution,  a  direct  tax.  It  may  be  said  to  come  within  the 
same  category  of  fixation  as  the  tax  on  incomes  ol  insurance 
companies.  "  ' 

Here,  again,  it  is  obvious  that  it  was  the  desire  of  tlie  court 
to  maintain  the  existence  of  a  tax  that  had  been  considered 
necessary  by  the  Secretary  of  the  Treasviy,  who  had  now 
become  the  chief  justice  of  the  supreme  court. 

A  few  years  later  the  question  ol   tiie  constitutionality  of 
the  inheritance  tax  arose  in  the  case   of  Scholcy   vs.  Rew.'' 
The  particular  c|uestion  involved  was  the  validity  of  the  tax 
imposed  by  the  United  States  on  the  right  to  take  real  estate 
by  inheritance.     The  counsel  argued  that  if  ever  there  were  a 
direct  tax  on  land,  this  was  a  tax.     \ct  the  court  unanimously 
decided  that  the  inheritance  tax  was  an  indirect  tax.    "Whether 
direct    taxes,  in  the  sense  of  the  Constitution,   comprehend 
any  other  tax  than  a  capitation  tax  and  a  tax  on   land,  is  a 
question  not  absolutely  decided  ;  nor  is  it  neces.sary  to  deter- 
mine it  in  the  present  ci'..se,  as  it  is  expressly  decided  that  the 
term  does  not  include  the  tax  on  income,   which  cannot  be 
distinguished  in  principle  from  a  succession  tax,  ^  .ch  as  the 
one  involved  in  the  present  controversy."     Thus  here,  agam, 
the  court  set  its  foot  against  the  attempt  to  restrict  by  inference 
the  tax  powerr  of  the  United  States,  and  upheld  the  inher- 
itance tax  on   the  giound   i;-.ai    it  could  not   be  distinguished 
in  principle  from  an  income  tax,  which  had  been  declared 
constitutional. 

Finally,  in  the  case  of  Springer  t^.  the  United  States, 
decided  in  1870,='  the  question  of  the  validity  of  an  income 
tax  imposed  on  an  individual  came  up  for  discussion,  and  the 
court,  by  a  unanimous  vote,  upheld  the  tax.  After  going 
over  the  history  of  the  convention  the  court  stated :  "  It 
does  not  appear  that  any  tax  like  the  one  here  in  .piestion 
was  ever  regarded  or  treated  by  Congress  as  a  direct  tax. 
This  uniform  practical  construction  of  the  Constitution  touch- 
ing so  important  a  point  .  .  .  is  a  consideration  of  great 
weight."     Referring  to  the  Ilylton  case,  it  went  on  to  say  : 

......  a  ,,  \\-iu. ..    711  ^  10-       ■>..  ?S6. 


■   *, 
■I 


.-   J 


576 


The  Income  Tax 


"  It  was  well  held  that  where  such  evils  would  attend 
the  apportionment  of  a  tax,  the  Constitution  could  not  have 
intended  that  an  apportionment  should  be  made.  This  view 
applies  with  even  greater  force  to  the  tax  in  question  in  this 
case.  Where  the  population  is  large  and  the  incomes  are 
few  and  small,  it  would  be  intolerably  oppressive."  After 
quoting  the  other  cases  mentioned  above,  the  decision  con- 
cludes:  "All  these  cases  are  undistinguishable  in  princip'k 
from  the  case  now  before  us,  and  they  are  decisive  against 
the  plaintiff  in  error.  The  question,  what  is  a  direct  tax,  is 
one  exclusively  in  American  jurisprudence.  The  te.\t-\ Titers 
of  the  country  are  in  entire  accord  upon  the  subject.  Our 
conclusions  are,  that  direct  taxes,  within  the  meaning  of  the 
Constitution,  are  only  capitation  ta.xes  as  expressed  in  that 
instr  iment,  and  taxes  on  real  estate,  and  t  lat  the  tax  of 
which  the  plaintiff  in  error  complains  is  within  the  category  of 
an  excise  or  duty." 


§  9.   T/ie  Income  Tax  Cases  of  iSg^ 

It  would  seem  impossible  to  go  farther  than  this.  Yet 
notwithstanding  the  unanimous  decisions  of  the  supreme 
court  on  the  question,  the  attempt  was  again  made  to  attack 
its  constitutionality  when  the  income  tax  law  of  1894  was  en- 
a«.ted.  What  had  been  borne  with  more  or  less  equanimity  in 
time  of  war  was  regarded  with  apprehension  and  determined 
opposition  in  time  of  peace ;  and  some  of  the  important 
financial  interests  now  engaged  a  notable  array  of  eminent 
counsel  to  essay  the  arduous  task  of  persuading  the  supreme 
court  that  it  might  declare  the  income  tax  a  direct  tax  with- 
out reversing  its  previous  decisions.  The  effort  was  made 
with  the  most  astonishing  degree  of  ability  and  ingenuity, 
and  the  briefs  and  arguments  of  the  opposing  counsel  fill 
several   large  volumes.' 

'  The  chief  documents  in  the  case  are  as  follows:  — 
(l)    Brt,-f  i^ii  hchalf  of  AppelLmli  in  iuf<porl  of  Cent"ilion  that  the  Prmisions 
lis  to  the  Imomf  Tax  emboJitJ  in  ilw  Tiiii/f  .tt  of  Augiiit  ^S,  iSt)/,  are 
L'luotistitutioiial.     liy  Joseph  H.  Choate,  (_'  o  A.  Seward,  Benjamin 


T/u-  Constitutionality  of  the  Income  Tax     577 

A  large  part  of  the  argument  was  taken  up  with  a  discus- 
sion of  the  question  of  uniformity,  the  counsel  contending  that 
the  word   "uniformity"  in  the  federal  constitution  had  the 

II.   M:     ,,,  ,   WiUiaiii   U.  Cluthric,  David   WiUcc.x,  and  (.harks  Steele. 

(2)  -•/.   'itu'inil  I'nti  u."./  .<  gitment  for  AppelUmls  on  Question  of  Direct  Tax. 

;/   -.-sar'l,  '.utlun-    MoraweU,  and   Steele,  Solicitors,  and  Joseph   II. 
i  o;  .1-  anil  Charles  ;'.  S-ul'-r^iavd  of  Counsel.     42  pp. 

(3)  'J'he  />«..;•«>,.    /  I'Kitiuil  F.ionomii:s  liefuiiiig  Dtrt-a  and  liuHreit  'J'.ixes. 

By  Max  West,  I'h.l).     .Submitted   by   Seward,  Cuthric,  Morawet/,  and 

Steele.     38  pp. 

(4)  Extracts  from  the   Evidence  proving  the  Historic   facts  from   the  general 

Litcratuie,  ,uui  from  the  Authorities,  tearing  upon  the  Question  -.vhdher 
the  Words  ''Direct  Tax"  and  "  Direct  Taxes,-  as  u-.ed  in  the  Federal 
Constitution,  cmhrace  a  Tax  on  Incomes,  or  arc  limitc.i to  a  Tax  on  land 
only.     SubMiitted  by  Seward,  (iuthrie,  Morawet/.,  and  Steele.     71  pp. 

(5)  Brief Jor  the  Continental  Trust  Company  of  the  City  of  Xcw  York,  .ippdlee. 

By  James  C.  Carter  and  William  C.  CJullivcr.     48  pp. 

(6)  Brief  for  Appellant  John   G.  Moore.     By  Samuel  Shell.ibarKer  and  Jere- 

miah W.  Wilson,  Attorneys,  and  Ceorgc-  K.  Idmunds  of  Counsel.     7,%  pp. 

(7)  lir^fon  Mialfofthe  '  nited  States.     By  Richard  <  >lney,  .Xttorney-General, 

^nd  Kdvvar  1  K.  Whitney,  .\sst.  .Mtorney-tleneral.     99  pp. 

(8)  opening    Ugument  hv  W.  A  Guthrie  on  Behalf  of  Complainants,  in  sup- 

port of  the   Contention  that  the  Income  Tax  Law  of  jSg.f  is  Vnconstitu- 

tional.     411  I'p- 

(9)  Mr    .Seward's  .Ugument  upon  the   Question  whether  the    Words  '' Ihrect 

Tax"  and-'  Direct  Taxe<:'  ai  used  in  the  Federal  Constitution,  emhraci 
a  Ta.:  on  Income,  or  are  limited  to  a  Tax  on  Land  only.     .S9  pp. 

( 10)    Oral  Ar^r„,„,.„,  of  Hon.  A'lchard  Olney,  Attorney-Cieneral.     21  pp. 

{ .  I )  Argument  of  .1/r.  fimes  ( '.  (  arte,;  for  the  Appellees.     61  pj). 

(12)  Closing  .  Irgument  /-v  Mr.  Choate  on  Behalf  of  Complainants,  xn  support  of 

the   Conte,  Hon  that  the  Income    Tax  Law  of  iSg4  "  Unconstitutional. 

82  pp.  ,,  J  t,     ■ 

(13)  opinion  of  the  Court  and  Opinions  of  Justices  Field,  iHnte,  and  Llarian. 

"i'  PP-  i-  11 

In  tho'rehearinR.  additi..nal  documents  were  filed.     These  are  as  follows  :  - 

{\^   Petition  for  Kehearing  In-  Appellants.     7  pp. 

( I O    On  I'etition  for  Rehearing  hv  the  Attorney- General.     3  pp. 

(16)   Brief  for  .ApNllants  in  support  of  Contention  that  the  I'rovisions  as  to  In- 

come  Tax  'cmlodied  ,n  the  Tariff  .let  of  August  ^S,  /  ?.;/.  are  L  neonstUH- 

tional.     [IW  same  Counsel.]     117  PP' 
(J7)    Brief  for  the  United  Stales  on  Petition  for  Rehearing.     73  PP- 
(18)   Appendix  to  HriefoH  Behalf  of  the  I  'nited  States.     18  pp. 
tig)   Extracts  from   lurgotsu/'inittedhy  the  United. States.     5  PP- 
(20)    Brief  for  Appellant  John  G.  Moore  m  no.  g,<,Jiled  by  leave  of  the  i  ourt  .n 


578 


The  Income  Tax 


same  meaning  as  in  the  state  constitutions,  and  that  the 
income  tax  was  therefore  unconstitutional  because  lacking 
in  uniformity.  Mr.  Whitney,  the  assistant  attorney-general, 
devoted  the  greater  portion  of  one  of  his  arguments  to  the 
attempt  to  prove  that,  on  the  contrary,  uniformity  meant 
only  geographical  uniformity.  In  its  decision  the  court, 
however,  entirely  ignored  this  question  on  the  ground  of 
an  even  division  of  opinion,  only  eight  judges  havinj;  sat;  but 
Justice  Field,  in  a  supplementary  opinion,  adopted  the  view 
of  the  counsel.  As  has  been  stated  above,  the  contention  of 
the  government  as  to  the  meaning  of  uniformity  was  com- 
pletely approved  in  the  inheritance  ta.x  case  decided  a  few 
years  later. 

The  other  argument,  however,  was  the  one  which  the  coun- 
sel pressed  home  with  remarkable  ingenuity  and  with  telling 
force.  It  was  to  the  effect  that  the  supreme  court  h.id  never 
specifically  held  a  tax  upon  the  income  from  land  to  be  an 
indirect  tax.  For  in  the  insurance  company  case  the  point 
of  till,  ownership  of  real  estate  by  the  company  was  not  ex- 
pressly made.  While  in  the  Sjiringer  case  it  so  happened, 
unfortunately  for  the  government,  that  the  income  of  Springer 
was  derived  partly  i  rom  professional  earnings  and  partly  from 
United  States  bonds.     The  counsel  now  argued  that  income 

numhers  Sc)^  amlSg^.     Hy  Samuel  Sliellcbargcr  and  Jcrciniah  M.  Wilson. 

attorneys;   CiCDrjjc   l'.  Edmunds,  Counsel.     25  jij). 
(21)   Kefily  to  Brief  ftUJ  on  lUhalf  of  John  G.  Afoore.     Submitted  l)y  the  L'nited 

States  Government.     3  ]>p. 
{2'.']   /.':storii\il  .Irguirii-ni  u/>on  Aftiiniiig  of  WorJs  "  Dirnt  Tax  "  and  "  Duly  " 

in  Constitution.     Sul)mitted  by  the  United  States.     91  pp. 
(2j)    Optning  Ar-;iimiiit  by  Mr.  II'.  P.  Guthrie, on  nehalf^f  Apfiilants.     70  pp. 

(24)  Oral  .Argument  of  lion.  Kiehard  Ohiey,  Attorney-General.     '9  pp. 

( 25 )  .Xrgument  of  I-.dward  H.  Whitney,  .Assistant  .  Iltornev-  General  on  Behalf  of 

the  L'nited  States,  upon  the  i'niformity  Question.     II  pp. 

(26)  Closing  .Arguments  by  .Mr.  Choale.     84  pp. 

(27)  Deeision  of  the  Court  on  the  Rehearing.      114  pp. 

A  large  part  of  the  material  cimtained  in  no.  4  and  no.  22  was  based,  to  a  great 
extent,  upon  a  manuscript  study  which  had  been  made  by  the  present  writer,  and 
which  r.as  put  at  the  disposal  of  both  sides.  No.  19  was  also  submitted  by  him. 
The  author  of  no.  3  was  a  student  of  the  uriter,  and  the  greater  part  of  that 
document  w.is  based  upon  statements  contained  in  his  lectures. 


\i  t 


The  Constitutionaiity  of  the  Income   Tax     579 


from  laud  cannot  be  distinguished  from  land  itself,  and  that 


land 


dir 


if,  as  every  one  concedes, 
the  income  from  laud  must  also  be  direct,  irrespective  of  the 
question  whether  the  tax  be  levied  specifically  on  the  income 
from  land,  or  as  a  part  of  a  general  income  tax.  This  argu- 
ment, admirably  elaborated,  convinced  the  court,  and  by  a 
close  vote  it  decided  in  the  first  Pollock  case  that  the  income 
tax  was  to  that  extent  a  direct  tax.  Even  from  this,  however, 
several  judges  dissented,  while  as  to  the  question  whether 
the  rest  of  the  income  tax  would  fall  with  the  decision  as  to 
the  real  estate  part  of  it,  the  court  was  evenly  divided.  The 
court  also  held  —  and  here  there  was  no  difference  of  opin- 
ion—  that  so  much  of  the  tax  as  fell  on  the  income  from 
state  bonds  was  unconstitutional,  not  bccau.se  it  was  a  direct 
tax,  but  because  the  federal  gove;.imeut  had  no  power  to 
tax  the  agencies  of  said  government.' 

This  decision  emasculated  the  income  tax,  leaving  it  in  a 
most  unsatisfactory  condition.  A  rehearing  was  therefore 
applied  for,  and  granted  by  the  court :  and  the  counsel,  on  the 
allegation  of  new  material  that  had  been  discovered,  made  a 
fresh  argument.  Starting  from  the  point  that  a  tax  on  the 
income  of  real  estate  had  now  been  adjudged  to  be  a  direct 
tax,  the  counsel  contended  that  a  tax  on  personal  property, 
or  on  the  income  of  personal  property,  is  also  a  direct  tax. 
Here,  again,  t'.iey  were  able  to  carry  with  them  a  bare  ma- 
jority of  the  court.  Although  the  ninth  judge,  Justice  Jack- 
son, who  had  arisen  from  what  soon  turned  out  to  be  his 
death-bed  in  order  to  hear  the  argument,  voted  in  favor  of 
the  constitutionality  of  the  law,  another  judge  in  the  mean- 
time changed  his  mind.  Thus  by  a  vote  of  five  to  four  was 
the  income  tax  declared  unconstitutional  because  it  was  not 
apportioned  according  to  the  rule  of  direct  ta.xation. 

The  second  decision  rested  largely  upon  the  interpretation 
of  the  historical  facts.  A  careful  and  unbiased  study  of  the 
documentary  evidence  shows,  however,  that  both  the  govern- 
ment and  the  opjiosing  counsel  made  extreme  claims,  which 

1  As  t'j  this  "articular  ^rininu-nt,  see  infra,  chap,  vi,  §  4. 


rl 


If 


58o 


The  Income  Tax 


cannot  be  substantiated.     The  argument  ol   aie  government, 
for   instance,   that   the    meaning  of   the  terms  "duty"  and 
"direct  taxation"  was  perfectly  clear  at  the  time  of  the  con- 
stitutional convention,  and  that  the  word  "duty"  was  intended 
to   cover  such  a  tax  as   the   income  tax,  goes  farther  than 
the  actual  facts  warrant.     That  is,  however,  almost  the  only 
e.xaggeration  in  the  government's  contention.     On  the  other 
hand,   the  counsel's  arguments  abound   in  historical  errors 
and  economic   inaccuracies.     To  expect  that  great  lawyers 
should  also  be  great  economis.^  is  perhaps  unreasonable;  but 
it  is  not  unreasonable  to  protest  against  such  a  statement  as 
this:    "A  tax   on   personal  estate  held   for  the  purpose  of 
income  is  directly  imposed  upon  the  owner,  and  ultimately 
borne  by  him  without  possibility  of  shifting  it  upon  any  one 
else.    The  owner's  subjection  to  it  is  absolute  and  imperative, 
with  no  choice  on  his  part  or  possibility  of  escape  from  it, 
short  of  abandoning  his  property."  >     This  completely  inde- 
fensible statement  in  the  brief  was  repeated  in  substantially 
the  same  words  in  Mr.  Choate's  closing  argument  and  ham- 
mered in  upon  the  court.^     Mr.  Seward's  misstatement  about 
the   references   to  Turgot    in    the   American   Museum   and 
Mr.  Guthrie's   mistaken  allegation  as  to  Turgot  have  been 
mentioned  above.^     Senator  Edmunds  emphasized   the   old 
economic  fallacy  that  taxes  upon  consumable   goods  differ 
from  direct  taxes  in  that  they  are  voluntarily  paid.*     Finally, 
well-nigh  all  the  counsel  harped  upon  the  point  that  it  was 
entirely  feasible  to  have  a  fairly  equal  income  tax,  even  if  it 
were   apportioned  according  to  the  constitutional  mandate! 
But  if  the  counsel  may  perhaps  be  excused  for  not  being 
sound  economists,  we  cannot  make  the  same  allowance  for 
their  errors  of  historical  fact.     Among  these  misstatements 

1  AdJitional  Brirf  and  Argument  for  Appellann  on  Question  of  Direct  Tux. 

p.  17. 

3  Closing  Argument  h  Mr.  Choate,  etc.  [in  first  case],  p.  30.    Also  in  157  U.b., 

p.  54t- 

»  Supra,  pp.  562-563. 

4  That  some  Invwi-rs  c.in  also  be  eooil  ecunnmists  isapparmt  from  the  effective 
answer  to  this  in  the  Argument  of  .Mr.  James  C.  Carter  for  the  Appellees,  p.  5. 


The  Constitutionality  of  the  Income   Tax     581 

are  the  following :  First,  we  arc  told  that  "  there  has  been 
an  income  tax  in  England  since  I435.  "  iin<i  "the  income  tax, 
therefore,  was  in  force  in  Great  Britain  at  the  time  that 
Mr.  Madison  spoke."'  Secondly,  it  is  alleged  that  in  1783 
the  eighth  article  of  confederation  was  changed  so  as  to  alter 
the  basis  of  direct  taxation  from  land  to  population.^  Thirdly, 
it  is  stated  that  incomes  were  taxed  in  the  New  Netherlands.^ 
Fourthly,  Mr.  Seward  contended  hat  at  the  date  of  the  f  .1- 
stitution  the  terms  "direct  taxes"  and  "indirect  taxes"  were 
household  words.* 

Rut  such  errors  and  misstatements,  which  might  be  multi- 
plied, pale  into  insignificance  compared  with  the  glaring 
misinterpretation  put  upon  the  origin  and  the  purpose  of  the 
direct-tax  clause  —  a  misinterpretation  which,  like  most  of 
the  preceding  mistakes,  was  adopted  bodily  by  the  majority 
of  the  court,  who  evidently  had  found  no  time  for  an  inde- 
pendent investigati<Mi  of  the  subject.  So  important,  indeed, 
did  this  point  seem,  that  the  reporter  of  the  second  Pollock 
case,  Mr.  J.  C.  Bancroft  Davi-,,  naturally  made  it  in  his  sylla- 
bus the  very  centre  of  the  decision,  in  the  following  words: 
"  In  distributing  the  power  of  taxation,  the  Constitution  re- 
tained to  the  States  the  absolute  power  of  direct  taxation,  but 
granted  to  the  Federal  government  the  power  of  the  same 
taxation  upon  condition  that,  in  its  exercise,  such  taxes  should 
be  apportioned  among  the  several  States  according  to  num- 
bers; and  this  was  done,  in  order  to  protect  to  the  States, 
who  were  surrendering  to  the  Federal  government  so  many 
sources  of  income,  the  power  of  direct  taxation,  which  was 
their  princii)al  remaining  source."  The  entire  falsity  of  this 
statement,  which  was  the  very  basis  of  the  decision,  has  been 
so  fully  explained  above''  that  we  may  here  pass  it  by,  with 
the  mere  reflection  that  even  supreme  court  justices  are 
human,  and  that  there  is  nothing  sacrosanct  about  any  one's 

'  Extracts  from  the  Evuitna  proving  the  Untoric  r.nts,  etc.,  pp.  lO,  49. 
^  niii.,  p.  ly.     .Vs  to  this  error,  see  supra,  p.  545. 

*  Ihiit.   p.  20.     As  to  this  error,  SL'e  supra,  p.  372. 

♦  Mr.  Se-MirUs  Ar^'umenl,  p.  18.  '•'Supra,  p.  55i>. 


582 


The  Income   Tax 


opinions  when  they  arc  founded  not  on  the  bed-rock  of  fact, 
but  on  the  shifting  sands  of  historical  error. 

The  opinion  of  the  court,  hence,  in  both  the  first  and  the 
second  cases,  calls  for  no  special  mention,  as  it  practically 
accepted  the  views  of  the  counsel  in  all  respects  except  on 
the  question  of  uniformity,  on  which  point  the  only  statement 
made  was  that  the  court  was  evcr.ly  divided.  Justice  Field, 
however,  in  the  first  case  delivered  the  remarkable  supple- 
mentary opinion  which  has  aptly  been  called  "his  tirade 
against  the  income  tax,"  Mevoted  almost  entirely  to  the  effort 
to  prrve  that  the  tax  was  so  grossly  lacking  in  uniformity  as 
to  make  it,  in  his  opinion,  unconstitutional.  He  spoke  of 
the  act  as  constituting  a  usurpation.  "  The  present  assault 
upon  capital  is  but  the  beginning.  It  will  be  but  the  stepping- 
stone  to  otheis  large-  and  more  sweeping  till  our  political 
conditions  will  become  a  war  of  the  poor  against  the  rich ;  a 
war  constantly  growing  in  intensity  and  bitterness."  And  he 
quoted  the  statement  of  an  anonymous  authority,  who  is  well 
known  to  have  been  the  late  David  A.  Wells,  that  "if  the 
court  sanctions  the  power  of  discriminating  taxation,  and 
nullifies  the  uniformity  mandate  of  the  Constitution,  it  will 
mark  the  hour  when  the  sure  decadence  of  our  present  gov- 
ernment will  commence."  If  Mr.  Wells  and  Justice  Field 
are  coirect,  the  decadence  of  our  government  is  in  full 
progress,  for  "discriminating  taxation"  is  now  the  law  of 
the  land,  as  it  is  the  custom  everywhere  else  in  the  civilized 

world. 

In  the  second  case,  pronounced  dissent  was  manifested  by 
four  of  the  judges,  not  only  to  the  general  view  of  the  ma- 
jority, but  also  to  the  extremely  conservative  opinion  of  Jus- 
tice Field.  Because  of  the  commanding  reputation  of  the 
judges  and  the  weight  of  their  arguments,  the  dissenting 
opinions  merit  careful  attention.^ 

1  Bullock,  in  PMitual S.ieiice  Qunr/erly,  vol.  \v  (1900),  p.  453. 

•  In  the  first  case,  the  ..|.inion  of  the  court  occupieil  sixty  pages,  the  (jpinions  of 
the  .lissentiiij;  iuclges  siMy-.ne  j.a-es.  In  tlie  secn-l  case,  the  tigures  are  twenty 
pages  t.irthe  liecisitm  ami  (iev.niy-se\en  pages  li>i  llie  Uiiscnting  ..j^ini^ins. 


The  Conslitutionalily  of  the  Imomc   Tax     583 

§  10.    The  Dissenting  Opinions 

In  the  first  income  tax  case  Justice  White,  speaking  for 
himself  and  Justice  Harlan,  posited  the  foliowin-  dilemiua:  "  If 
the  framers  Uiiderstood  the  meaning  of  the  word  'direct'  in  the 
Constitution,  the  practical  effect  which  they  gave  to  it  sh<ndd 
remain  undisturbed;  if  they  were  in  doubt  as  to  t'.-e  meaning, 
the  interpretation  long  since  authoritatively  affixed  to  it  should 
be  upheld."  lie  pointed  out  that  the  opinion  of  the  court 
"  virtually  annuls  its  previous  decisions  in  regard  to  the  posv- 
ers  of  Congress  on  the  subject  of  taxation.  an<l  \^  therefore 
fraught  with  danger,  to  the  Court,  to  each  and  every  citi/en 
and  to  the  republic."  And  he  concluded  that  "  if  the  perma- 
nency of  its  conclusions  is  to  depend  ui)on  the  personal  opini-^ns 
of  those  who,  from  time  to  time,  may  make  up  its  membership, 
it  will  inevitably  become  a  theatre  of  political  strife." 

In  the  second  case,  where  four  dissenting  opinions  were  fded. 
Justice  Harlan  stated:  "In  my  judgment    -to  say  nothing  of 
the  disregard  of  the  former  adjudications  of  this  court,  and  of 
the  settled  practice  of  the  government  —  this  decision  may 
well  excite  the  gravest  apprehensions.     It  strikes  at  the  very 
foundations  of  national  authority,  in  that  it  denies  to  the  gen- 
eral government  a  power  which  is,  or  may  become,  vital  to  the 
very  existence  and  preservation  of  the  Union  in  a  national 
emergency.  ...     It  tends  to  reestablish    that  condition    of 
helplessness  in  which  Congress  found  itself  during  the  period 
of  the  Articles  of  Confci  -ation."  »     He  thereupon   referre-l 
to  the  practical  impossibility  of  levying  an  income  tax  by  way 
of  apportionment :  "  No  such  apportionment  can  possibly  ^>e 
made  without  doing  gross  injustice  to  the  many  for  the  benefit 
of  the  favored  few  in  jnirticular  .States.     Any  attempt  upcn 
the  part  of  Congress  to  apportion  among  the  States,  upon  the 
basis  simplv  of  their  population,  taxation  of  personal  proper.y 
or  of  incomes,  would  tend  to  arouse  such  indignation  amonj; 
the  freemen  of  America  that  it  would  never  be  rei>eau-d. 
He  concluded,  "  I  cannot  assent  to  an  interpretatjon  oi  th- 


ill 


m^ 


5«4 


T/u-  Jiuome   Tax 


Constitution  that  impairs  and  cripples  the  just  powers  of  the 
National  fiovernment  in  the  essential  matter  of  taxation,  and 
at  the  same  time  discriminates  against  the  greater  part  of  the 
people  of  our  country.  .  .  .  The  practical  effect  of  the  de- 
cision to-day  is  to  give  to  certain  kinds  of  property  a  position 
of  favoritism  and  advantage  inconsistent  with  the  fundamental 
principles  of  our  social  organization,  and  to  invest  them  with 
power  and  influence  that  may  be  perilous  to  that  portion  of 
the  American  people  upon  whom  rests  the  larger  part  of  the 
burdens  of  the  government,  and  who  ought  not  to  be  subjected 
to  the  dominion  of  aggregated  wealth  any  more  than  the 
property  of  the  country  should  be  at  the  mercy  of  the  law- 
less." ' 

Justice  Brown,  in  referring  to  the  opinion  of  the  counsel 
and  the  court  that  an  ajiportioned  income  tax  was  perfectly 
feasible,  said:  "  If  the  States  should  adopt  a  similai  system 
of  taxation  and  allot  the  amount  to  be  raised  among  the  dif- 
ferent cities  and  towns,  or  among  the  different  wards  of  the 
.same  State,  in  proportion  to  their  population,  the  result 
would  be  so  monstrous  that  the  entire  public  would  cry  out 
against  it.  Indeed,  reduied  to  its  last  analysis,  it  imposes 
the  same  tax  upon  the  laborer  that  it  does  upon  the  mil- 
lionaire."" -'\nd  after  going  fully  into  the  legal  as  well  as 
the  economic  aspects  of  the  case,  he  contended  that  a  tax 
on  rents  is  an  indirect  tax  on  lands.*  Calling  attention 
to  the  fact  that  "even  the  spectre  of  socialism  is  conjured  up 
to  frighten  Congress  from  laying  taxes  upon  the  people  in 
I)roportion  to  their  ability  to  pay  them,"  he  concluded :  "  It 
is  certainly  a  strange  commentary  upon  the  Constitution  of 
the  United  States  and  upon  a  democratic  government  that 
Congress  has  no  power  to  .ay  a  tax  which  is  one  of  the  main 
sources  of  revenue  of  nearly  every  civilized  State.  It  is  a 
confession  of  feebleness  in  which  I  find  mv-^elf  wholly  un- 
able to  join.  While  I  have  no  doubt  that  Congress  will  find 
some  means  of  surmounting  the  present  crisis,  my  fear  is 
that  in  some  moment  of  national  peril  this  decision  will  rise 


»  i;S  f.s., 


6S; 


I IHJ.,  p.  689. 


J  lbu> 


oyj- 


The  Constilnlionality  of  the  Iinoiitc    Tux     5.S5 

up  to  frustrate  its  will  and  pai.  lyzc  its  ;irm.  I  hope  it  rniiy 
not  prove  the  first  step  toward  the  submeri^eiicc  of  tho  liljcr 
ties  of  the  people  in  a  sordid  despotism  of  wealth.  As  I  >  aii- 
not  escape  the  conviction  that  the  decision  of  the<oiirt  in  this 
great  case  is  fraught  with  immeasurable  danger  to  the  future 
of  the  country,  and  that  it  aijproaches  the  i)roportions  of  a 
national  calamity,  I  feel  it  a  duty  to  enter  my  i)r<.lest  H;.',:iiii>-t 

it."  » 

Justice  Jackson  pointed  out  that  "we  cannot  attribute  to 
the  framers  of  the  Constitution  an  intention  to  make  any  tax 
a  direct  tax  which  it  was  impossil)le  to  apjjortion.      Ff  it  <  an 
not  be  apportioned  without  gross  injustice,  we  nviy  feel  as- 
sured that  it  is  a  ta.x  never  contemplated  by  the  ConstituUon 
as  a  direct  tax.  .   .  .     The  fact  that  a  tax  cannot  he  so  ap- 
portioned without    producing  gross  injusti-.e    and    ine'iuality 
among  those  required  to  pay  it   sliould   settle  the   '|uestiori 
that  it  was  not  a  direct  tax  within  the  true  sense  and  mean- 
ing of  those  words  as  they  are  used  in  the  (,"on>-titution." - 
And  he  concluded  :  "  This  decision,  in  effect,  relieve  .  t!.e  '  iti 
zens  having  the  greater  ability,  while  the  burdens  of   la.xation 
arc  made  to  fall  most  heavily  and  oppressively  >i[.on  th'.  e 
having  the   least  ability.      It  lightens  the  burden    ui^on   the 
large  number,  in  some  States  subject  tu  the  tax,  at^J  p'a'.'. 
it  most  unequally  and  disproportirniately  on  the  snn.ller  v.  .v. 
ber  in  other  States.     Considered  in  all  it^  beiri.'i^  ,  th;s 
ci.  ,   n   is,   in   my   judgment,   the   most  di^astrois 
struck  at  the  constitutional   power  of  Con^re-'-. 

Finally,  Justice  White  stated  that  "the  inju-tice  ^of  the 
conclusion  points  to  the  error  of  adopting  it.  It  '.ake^  in- 
vested wealth  and  reads  it  into  the  Coi.stiv.tiori  as  a  fa'.ore-i 
and  protected  class  of  property,  which  tanr.ot  be  ta\e'i  v.]-;  - 
out  apportionment,  whilst  it  leaves  the  or.^uj.ati'n  of  the 
minister,  the  doctor,  the  professor,  the  lawyer,  the  inventor, 
the  author,  the  merchant,  the  mechanic  and  a;!  other  forms 
of  industry,  upon  which  the  j-rosj-erity  of  a  peo;>:e  rri-st  de- 
pend, subject  to  taxation  without  thai  coi^dition.     A';u  w.nere 

1  i;8L-.^.,  p.  O95.  :iy/r/..  T.  703  '/ri..  ::     7''-^'- 


blow   ever 


586 


Tlu  Income  Ta.c 


it  works  out  this  result,  which,  it  seems  tc  ne,  stultifies  the 
Constitution,  by  making  it  an  instrument  of  the  most  griev- 
ous wrong,  it  should  not  be  adopted,  espcciilly  when,  in  order 
to  do  so,  the  decisions  of  this  court,  the  opinions  of  the  law 
writers  and  publicists,  tradition,  practice  and  the  settled  policy 
of  the  government  .i.ust  be  overthrown."  '  He  closed  by  the 
statement :  "  It  is,  I  suijmit,  greatly  to  be  deplored  that,  after 
more  than  one  hundred  years  of  our  national  existence,  after 
the  government  has  withstood  the  strain  of  foreign  wars  and 
the  dread  ordeal  of  civil  strife,  and  its  people  have  become 
united  and  powerful,  this  court  should  consider  itself  com- 
pelled to  go  back  to  a  long  repudiated  and  rejected  theory  of 
the  Constitution,  by  which  the  government  is  deprived  of  an 
inherent  attribute  of  its  being,  a  necessary  power  of  taxation."" 


§11.    The  Effect  of  the  Decision 

When  it  is  considered  that  all  the  preceding  decisions  of 
the  court  on  the  question  of  direct  taxation  were  unanimous, 
and  that  this  decision  was  rendered  by  the  barest  of  majorities  ; 
when  it  is  remembered  that  the  decision  is  based  upon  glaring 
historical  errors  and  undoubted  misinterpretations  of  what 
actually  took  place  a  century  and  a  quarter  ago ;  and  finally, 
when  we  recollect  that  all  of  the  dissenting  opinions,  while 
taking  up  different  phases  of  the  legal  argument,  agree  in 
considering  the  decision  of  the  court  to  be  fraught  with  the 
utmost  danger  to  the  perpetuation  of  the  republic,  it  is  not 
to  be  wondered  at  that  the  country  did  not  acquiesce  in  the 
decision.  There  soon  appeared  a  flood  of  articles  and  pam- 
phlets, a  few  of  which  upheld  the  court,  but  the  great  majority 
of  which  sharply  criticised  the  findings,  although  mainly  on 
general  grounds.^     The  echo  of  these  criticisms  reached  Con- 

'  1 5S  U.S. ,  p.  7 1 2.  2  !H.L,  p.  7 1 5. 

'  Among  the  most  important  of  these  articles  were  the  following:  Cleurge  F. 
Kdmunds,  "The  Salutary  Result^,  of  the  Income  Tax  Decision,"  The  Forum, 
vol.  xix  (1905),  pp.  5I,J  el  seq.:  E<l«aril  H.  Whitney,  "The  Political  Dangers  of 

tho  Income  Ta\   Dcci^i'-n,"  ihiil.,  p;,'.  Jil  c!  re:;.:  Sy'v.-slrr   Pc:i;ioyrr,  "  Ti:e  !ti- 
come  Tax  Decision  and  the  Power  of  the  Supreme  Court  to  nullify  Acts  of  Con- 


Tlu  CoHslitutionality  of  the  Income  Tax     587 


gress,  and  every  few  years  the  question  came  up  attain.  As 
a  type  of  the  current  criticisms  we  select  the  speech  cf  Flem- 
ing, of  Georgia,  in  the  House  of  Representatives,  on  April  28, 

Fleming  called  attention  to  the  practical  consequences  of 
the  decision.  He  pointed  out  that,  tested  by  the  income 
tax  figures  of  1866,  as  compared  with  the  existing  situation, 
if  the  taxes  were  levied  according  to  what  had  now  been 
declared  to  be  the  sole  constitutional  method,  a  citizen  in 
Massachusetts  would  pay  2.8  per  cent  on  his  income  and  a 
citizen  of  Minnesota  32.9  per  cent.  "  .Vny  man  with  the 
smallest  capacity  for  practical  affairs  can  see  at  a  glance,"  he 
said,  "that  it  is  utterly  impracticable  for  Congress  to  raise 
money  by  a  direct  tax  on  land  or  personalty  or  on  incomes  in 
the  manner  required  by  the  decision  of  the  court.  Congress 
has  been  stripped  of  effectual  power  to  place  a  tax  on  wealth, 
and  it  is  limited  in  raising  revenue  to  putting  taxes  on  con- 
sumption." .  .  .  "The  nation  has  grown  in  all  other  attributes 
of  sovereignty,  but  has  Ujst  its  once-admitted  power  of  taxa- 
tion.'"'^ Fleming  pointed  out  that  the  situation  in  1894  dif- 
fered materially  from  18S6.  "  In  the  meantime  wealth, 
especially  corporate  wealth,  had  waned  in  patriotism  and 
waxed  in  power.  It  was  no  longer  willing  to  bear  its  just 
share  of  governmental  expenses,  and  with  great  ability,  mar- 
velous ingenuity  and  supreme  audacity,  it  undertook  to  con- 
vince the  highest  court  of  the  nation  that  it  ought  to  reverse 

gress,"  American  Law  h'fvinv,  veil.  v:;ix  (1895^  pp.  550  et  se,/. ;  L.  .Mien,  The 
Income  Tax  Decision  ;  an  .Vnswer  to  (lovcrnor  IVnnoycr,"  Xorth  Amtrican 
Review,  vol.  clx  (iS^iX  pp.  .S4  et  se,/. :  G.  S.  Houtwell,  "The  Income  Tax  ;  the 
Decision  of  the  Supreme  Court,  »/'»'./.,  pp.  589  <■/  s/,;. :  J.  K.  licach,  "The  Income 
Tax  Decision,"  T'le  Vale  Kevifn;  vol.  v  flSof"),  p.  58;  K.  L.  Codkin,  "The 
Income  Tax  Decision,"  the  /.uirnal  of  rolilical  luonomv,  vol.  iii  (1895), 
pp.  509  ,•/  seij.  :  C.  C.  Tieilemcn,  "The  Incon.c  Tax  Decisions  as  an  Object  Les- 
son in  fonstitutional  Omstructi  m,"  .Iniia/s  of  the  American  Academy  of  Political 
atul  S0ci.1l  Science,  vol.  vi  (181)5),  pp   jCi8  ,■/  iC,/. 

"  Congressional  Record,  vol.  .51,  appendix,  pp.  381  et  set/.  This  speech  was 
reprintcil,  with  the  title,  The  Income  Tax— its  Relation  to  Political  Economy, 
to  thr  Constilution,  and  to  the  Supreme  Vourt  Decision.  Hy  William  II.  KLmitit,' 
\Vashinj;!..n,  1S9S.  -  'V   •'''•■  !■•  "■ 


^88 


The  Income   Tax 


a  decision  it  had  upheld  for  a  century.  The  battle  ra^ed 
anew  with  hairsplitting  distinctions  around  that  little  word 
'  direct;  ulthouRh  its  legal  meaning  had  been  definitely  fixed 
and  accepted  for  a  century."  ' 

Referring  to  the  decisions  of  the  supreme  court.  Flemmg 
went  on  to  say :   "  No  member  of  this  high  tribunal  who  has 
a  proper  appreciation    of  the  relations  he  sustains   to   the 
people,  will  claim  that  the  court  or  its  decisions  are  above 
respectful  criticism."     He  quoted  with  telling  effect  the  state- 
ment of  one  of  the  supreme  court  justices  himself:  "It  is  a 
mistake  to  suppose  that  the  Supreme  Court  is  either  honored 
or  helped  by  being  spoken  of  as  above  criticism.     On  the 
contrary,  the  life  and  character  of  its  justices  should  be  the 
objects  of  constant  watchfulness  by  all.  and  its  judgments 
subject  to  the  freest  criticism."'    Fleming  continued:  "It  is 
not  too  much  to  say  that  in  both  decisions  of  the  income  tax 
cases  under  the  act  of  1894  those  printed  opinions  which  up- 
hold the  constitutionality  of  the  law  are  considered  by  the 
profession  at  large  as  stronger  expositions  of  the  true  princi- 
ples involved  than  tbo  printed  opinions  in  favor  of  the  con- 
trary doctrine.     Besideb.  Hroad-mindcd  men  cannot  but  think 
that  in  passing  upon  such  an  issue  the  justices  should  not 
have  relied  so  much  on  verbal  niceties  and  technical  legalisms, 
but  should  have  followed  the  example  of   their  illustrious 
predecessors,   when   facing   similar   issues,  by  basing   their 
decisions  more  firmly  on  long  established  precedents,  and  on 
broad  principles  of  constitutional  construction,  keeping  also 
in  mind  the  tremendous  political  and  economic  results."     He 
concluded :  "  Let  us  hope  for  relief  through  the  court,  seeing 
as  we  do,  that  the  decision  was  a  judicial  anomaly,  a  political 
anachronism  and  an  economic  blunder." 

From  year  to  year  the  feeling  grew  that  something  must 
be  done  to  extricate  the  nation  from  an  awkward,  if  not  a  per- 
ilous, situation. ^^    The  income  tax  was  commonly  referred  to  as 

^Op.cU.,vn.  »0/.r,7.,p.  12 

^  CI.  the  sxcell-nt  artirl*  hy  Max  West.  "  The  Income  lax  ami  the  National 
Kovcnues."  Journ~il  of  Political  Economy,  vol.  viii  (  kjoo),  pp.  433  ''  '"I-     l""' 


It 


Tlw  Conslilutiona    [y  of  the  Imome    Tax      sSg 

"the  Dred  Scott  ilocision  of  government  reveniu-."  Gr;ulii- 
ally,  however,  the  conviction  was  strcnt,'thenc(l  that  it  svas 
in  vain  to  hoj>c  for  a  chanRC  in  the  suprente  court  wliich 
would  convert  the  minority  into  a  majority,  and  which  woiiltl 
reverse  the  decision;  for  it  was  felt  that  such  a  proceeding 
would  undoubtedly  impair  its  prestij^e.  The  only  alternative, 
however,  was  an  amendment  of  the  constitution,  which  would 
permit  what  the  court  had  stated  is  now  jirohihited.  The 
alternative  was  the  plan  finally  determined  upon,  although  it 
took  almost  fifteen  years  of  at;itation  and  of  development  of 
public  sentiment  before  Con«;ress  was  able  to  submit  such  an 
amendment.  With  this  amendment  we  shall  now  have  to 
deal. 

Uter  «rticlc«,  «ee  Wayne  MacVcagh,  "  Ctaduativl  Tavatii.n  of  Irm-mcs  .iml  Iiihir- 
itance,"  Xorth  Ameru.tn  Kr.ie-v,  vi.l.  iS.>,  pp.  S2  i  ,/  -  .■  .  an. I  the  discussion  ..n 
thr  sulijcil  <if  the  imume  lax  at  the  Sixth  Annual  Mictinc  of  the  National  fivu- 
Kedcration,  liy  Andrew  ('arnt■^;ic  ami  others  in  the  Xattonal  Civic  Jh/fr.itidH 
Xtview,  vol.  ii  (lyo;),  pp.  14  tl  uf. 


CHAPTER  VI 


r 


The  Proposed  Sixteenth  Amendment  to  the  Consti- 
tution 

§  I.    T/ii'  Origin  of  the  Amimivtcnt^ 

We  have  stated  the  reasons  why,  if  an  income  tax  was  to 
be  made  possible,  an  amendment  of  the  constitution  was  im- 
perative. For  a  time,  indeed,  it  seemed  as  if  th*'  supreme 
court  might  recede  from  its  position,  especially  when  it  held 
th?t  the  inheritance  tax  imposed  during  the  Spanish  War 
was  not  a  direct  tax,  and  that  the  earlier  case  of  Scholey  vs. 
Rew  2  had  not  been  o  verruled  by  the  Pollock  case.  In  reality, 
however,  the  court  did  not  attempt  to  alter  the  decision  in 
the  Pollock  case,  which  it  restated  as  being  to  the  effect  that 
"a  tax  which  was  in  itself  direct,  because  imposed  upon  prop- 

'  This  chapter,  excepting  sections  one  and  five,  iiriginally  appeared  in  the 
Political  Science  Quarterly  for  June,  I910.  The  advance  copies,  however,  ucre 
published  and  circulated  early  in  March.  In  Ap.il  appeared  the  Meinoraniiiim 
submitted  to  the  Legislature  of  the  St„l-  of  Xew  York  in  Offontion  to  the  Amend- 
vient,  by  six  of  the  leading  lawyers  of  New  York.  T'oe  full  lillc  of  tnis  will  be 
found  supra,  p.  558.  Two  weeks  later  appeared  a  defence  of  the  amendment 
by  another  distinguished  lawyer,  J.  Hampden  Dougherty,  The  Proposed  Six- 
teenth Article  of  Amendment  to  the  Constitution  of  the  I  'niled  States.  Memoran- 
dum containing  <>  Criticism  of  Objections  to  the  Amendment,  and  some  A'easons 
for  Its  Adoption.  At  the  end  of  March  the  New  York  Economic  Club  held  a 
meeting  at  which  four  addresses  on  the  subject  were  delivereii,  all  of  which  were 
printed  in  i\\fi  Journal  of  Accountancy  in  May,  vol.  x  (loio),  pp.  18-42.  The 
addresses  opposed  to  the  amen  Iment  were:  William  D.  (iuthrie,  "  No  Taxation 
without  Representation";  and  Austen  G.  I'ox,  "Insert  no  Ambiguity  intt)  the 
Constitution."  The  addresses  in  favor  of  the  amendment  were:  Lawson  Purdy, 
"The  Income  Tax  Amen<lment  should  be  Kalilied";  and  Senator  William  K. 
Borah,  "The  Income  Tax  .Sound  in  Law  and  F.conuiiiics."  Kor  other  articles  on 
the  subject,  see  Dwight  \V.  Morrow,  "The  Income  Amendment,"  Co/umMa  law 
A'A'iew,  vol.  x  (1910),  pp.  379  et  se,/. ;  and  W.  K.  lU.rah.  "The  Income  Tax 
Amenibiient,"  .Vorth  American  Kevie-v,  vol.  19I  (1910),  pp.  755  et  se,/. 
-  23  Wallace,  331. 

590 


The  Proposed  Sixteenth  Amendment         5^1 

erty  solely  by  reason  of  its  ownership,  could  not  be  changed 
by  affixing  to  it  the  qualification  of  excise  or  duty."  And  in 
another  passage  the  court  gave  still  more  i>recision  to  the 
existing  rule  by  stating  :  "  First,  that  no  sound  distinction 
existed  between  a  tax  levied  on  a  person  solely  because  of 
his  general  ownership  of  real  property,  and  the  same  tax 
imposed  solely  because  of  his  general  ownership  of  personal 
property.  Secondly,  that  the  tax  on  the  income  derived  from 
such  property,  real  or  per.sonul,  was  the  legal  equivalent  of 
a  direct  tax  on  the  property  from  which  said  income  was 
derived,  and  hence  must  be  apportioned." ' 

Very  shortly  after  this  the  court  again  had  occasion  to  take 
up  the  question  of  direct  taxation.  W'iien  the  internal  rev- 
enue was  increased  in  1898,  during  the  Spanish  War,  it  was 
proposed  to  tax  corporations  on  their  gross  earnings.  When 
the  bill  emerged  from  committee,  however,  it  became  "  a 
special  excise  tax  on  the  gro.ss  receipts  of  companies  refin- 
ing petroleum  or  refining  sugar,"  and  as  such  became  law. 
This  act  was  attacked  as  obnoxious  to  the  income  tax  deci- 
sion, but  was  upheld  by  the  court.^  Although  the  decision  was 
again  in  harmony  with  the  Pollock  case,  hopes  were  never- 
theless aroused  in  the  minds  of  some  that  the  court  would  see 
its  way  clear  to  make  further  distinctions.  The  opportunity 
for  this,  however,  did  not  arise.  As  late  as  1900,  indeed, 
President  Roosevelt  in  his  annual  message  stated  that,  a 
"graduated  income  tax  of  the  proper  type  would  be  a  de- 
sirable feature  of  federal  taxation,  and  it  is  to  be  hoped  that 
one  may  be  devised  which  the  supreme  court  will  declare 
constitutional." 

By  iT'iS,  however,  this  had  become  so  doubtful  that  the 
Democratic  platform  included  a  resolution  that  "  we  favor 
an  income  tax  as  part  of  our  revenue  system,  and  we  urge 
the  submission  of  a  constitutional  amendment  specifically 
authorizing  congress  to  levy  and  collect  a  tax  upon  individual 
and  corporate  incomes,  to  the  end  that  wealth  may  bear  its 

'  Of',  (it.,  p.  82. 

2  Sprerkels  Sucar  Refining  Company  vs.  McClain,  192  I'.S.,  397. 


ir^^^E^A^M^T^^!!v^^T^!~2^T^r^r^^~T^ 


592 


rhe  I  urn  me    'J'ikk 


proportionate  share  of  the  burdens  of  the  federal  govern- 
ment." The  candidate  of  tlie  Republican  party,  Mr.  Taft, 
did  not,  however,  agree  with  this.  In  his  speech  of  accept- 
ance on  July  28,  1908,  he  said  :  "  In  my  judgnient  an  amend- 
ment to  the  constitution  for  an  income  tax  is  not  necessary. 
I  believe  that  an  income  tax,  when  the  protective  system  of 
customs  shall  not  furnish  income  enough  for  individual  needs, 
can  and  should  be  devised  which,  under  the  decisions  of  the 
sujjreme  court  will  conform  to  the  constitution."  After  the 
victory  of  the  Republicans  at  the  polls,  Mr.  Taft's  views 
seemed  to  have  changed,  for  in  his  inaugural  address,  while 
not  opposing  an  income  tax,  he  said  nothing  about  it,  but 
suggested,  obviously  in  its  stead,  an  inheritance  tax.  "  Should 
it  be  impossible  to  do  so  [secure  sufficient  revenue]  from  im- 
port duties,  new  kinds  of  taxation  must  be  adopted,  and, 
among  these  I  recommend  a  graduated  inheritance  tax  as 
correct  in  principle  and  as  certain  and  easy  0/  collection." 

In  conformity  with  this  recommendation,  an  inheritance 
tax  provision  was  introduced  into  the  new  tariff  bill  that  was 
discussed  in  the  spring  of  1909.  It  soon  became  apparent, 
however,  that  the  movement  in  the  West  in  favor  of  some 
kind  of  income  taxation  had  become  exceedingly  strong.  So 
loud  was  the  opposition  of  the  insurgents  to  the  proposed 
Payne-Aldrich  tariff  that  the  leaders  of  the  Republican  party 
recognized  the  impossibility  of  securing  enough  votes  to 
carry  the  tariff  unless  some  concessions  were  made  on  the 
question  of  the  income  tax.  As  early  as  April  15,  Senator 
Bailey,  of  Texas,  had  moved  an  amendment  for  a  general  in- 
come tax,'  at  the  rate  of  three  per  cent  of  incomes  over 
$5000,  and  six  days  later,  Senator  Cummins,  of  Iowa,  pro- 
posed a  graduated  income  tax*  on  all  incomes  over  $5000, 
the  rates  ranging  from  two  up  to  six  per  cent  on  all  incomes 
over  Si 00,000.  These  two  amendments  were  later  on  con- 
solidated, and  became  known  as  the  Bailey-Cummins  amend- 
ment.    A  general  discussion  now  ensued,  in  which  many  of 

'  Com^ifssioiiiil  KecoyJ,  Vdl.  44  (igoy),  p.  1351. 
2  Op.  at,  p.  1468. 


The  Proposed  Sixieenih  Ammdment  593 

the  progressives  of  both  parties  spoke  in  favor  of  an  income 

The   strength   which    the    income-tax    proposition   devel- 
oped alarmed  the  Republican  leaders  considerably     When 
therefore,  the  inheritance-tax   provision    was  dropped,  very 
largely  because  of  the  opposition  of  the  various  states  an  at 
tempt  was  made  to   placate  the  insurgents  by  agreeing  to 
enact  at  once  a  tax  on  corporate  incomes,  and  to  couple  with 
this   the   submission    of   an    income-tax  amendment   to   the 
states      President  Taft  now  declared  his  conversion,  and  in  a 
special  message  of  June  16,  1909,  he  stated:  "Although  I 
have  not  considered  a  constitutional  amendment  as  necessary 
to  the  exercise  of  certain  phases  of  this  power  [to  tax  in- 
comes],   a   mature  consideration   has   satisfied    me   that  an 
amendment  is  the  only  proper  course  for  its  establishment  to 
Its   full  extent.     I    therefore  recomr  ^nd  that  both  Houses 
.  .  .  shall   propose  an  amendment  to  the  constitution    con- 
ferring the  power  to  levy  an  income  tax  upon  the  national 
government   without   an   apportionment   among   the   states 
...     I  have  become  convinced  that  a  great  majority  of  the 
people  of  this  country  are  in  favor  of  vesting  this  national 
government  with  power  to  levy  an  income  tax." 

The  programme  was  accordingly  carried  out.  The  corpo- 
ration tax  was  adopted,  but  in  the  form  of  a  tax  only  on 
corporate  dividends  at  the  rate  of  one  per  cent.  Senator  Al 
dnch  stated,  on  June  29.  "  I  shall  vote  for  the  corporation  tax 
as  a  means  to  defeat  the  income  tax,"  2  and  Senator  Root 
said  :  '<  Gentlemen  may  assume  I  am  for  the  corporation  tax  to 
beat  the  income  tax.     I  care  not.     I  am  for  the  corporation 

'.\mong  these  speeches  are  especially  to  he  noted  those  of  Hitchcock  on 

r^,  "7«  °i  "^"  "':/  ■*'•  ^-  ''■'"  •  "'  """  ""  ^'='^^h  -'■•  "/•  ->••  vol  44,  p. 
502  ;   of  Ba.ley  on  May  3  anrl  4.  ./.  a.'.,  pp.  ,6o*  and  .749  :    of  lJ.,rah  on  >U      , 

May  2„  »A  a,.,  p.  .5.8  ;  and  of  Cun.min,  on  July  7.  op.  ni.,  p.  4385.  In  the 
House  of  Represen,at,ves  also  a  nun,!,,,  of  speeches  were  delivere.l  I  favor  of 
the  income  tax,  especially  In-  Dixon.  Hol.on,  Dies.  Sharp,  Hamlin.  Cline.  and 
Hin»h«w.      Op.  nl.,  pp.  4524-4685. 

-  Cc,^,-ii!,.ii,t;  Afcora,  vol.  44,  pt.  m,  p.  3929. 


594 


Tlu  Income  Tax 


tax  because  I  think  it  is  better  policy,  better  patriotism,  and 
higher  wisdom  than  the  general  income  tax,  at  this  time, 
and  under  these  circumstances."  The  other  part  of  the 
agreement,  however,  was  the  submission  of  the  constitutional 
amendment. 

It  would  naturally  occur  to  an  unbiased  observer  that  the 
simplest  way  out  of  the  difficulty  would  be  entirely  to  elimi- 
nate from  the  constitution  the  clause  or  clauses  referring  to 
direct  taxes.     We  have  learned  that  the  only  reason  of  its 
original  insertion  was  to  effect  a  compromise  on  the  slavery 
question.     Now  tliat  slavery  had  long  been  abolished,  there 
was  no  further  reason  for  retaining  the  clause  in  the  constitu- 
tion.    We  have  learned  what  difficulty  was  caused  by  a  proper 
interpretation  of  the  direct  clause,  not  only  as  affecting  the 
income  tax,  but  as  affecting  many  other  measures  enacted  by 
Congress.    We  must  not  forget  that  as  long  as  the  words 
"direct  taxation"  are  retained  in  the  constitution,  similar  diffi- 
culties wili  arise  in  the  future,  even  if  the  income  tax  matter  is 
disposed  of.     Hamilton's  prophecy  that  we  shall  be  at  a  loss 
to  find  any  disposition  of  the  matter  which  can  satisfactorily 
determine  the  point   has   not   only  come  true  but  will   re- 
main true  in  the  future.     As  it  has  been  well  said  by  Judge 
Whitney :    "  Apportioned  taxes   have  turned   out  a  failure. 
They  are  difficult  enough  to  assess  within  the  limits  of  a 
state  and  under  control  of   a   state  board   of  equalization. 
They  have  been  tried  by  the  nation,  and  each  trial  was  a 
failure.      The  last   direct   tax    levied  was  paid  back   again. 
There  will  probably  never  be  another.     Whatever  taxes  are 
levied  in   the  future  will   be  levied   under   the  rule  of  uni- 
formity.     If   we   are   to   amend   the  constitution,   a  matter 
now  so  often  discussed,  we  should  not  try  to  tinker  it  by 
introducing  a  specific  exception  to  a  broken  down  general 
rule."  1 

Congress,  however,  was  unfortunately  not  much  interested 
in   the  larger  question.     What   gave  it   immediate  concern 


1  F:!'.var!!  B.  Whitnov.  "The   Imcime  Tax  and  the  Constitution. 
law  KrAe-v,  vol.  xx  (1907).  p-  296. 


HarvaiJ 


The  Proposed  Sixteenth  Amendment        595 

was  the  disposition  of  the  pending  imbroglio.  It  was  there- 
fore decided  to  arrange  the  matter  by  an  amendment  to  the 
constitution  which  would  affect  only  the  income  tax.  A 
proposition  by  Senator  McLaurin,  on  July  5,  to  strike  out 
the  words  "direct  ta.xes  "  in  the  respective  clauses  of  the 
constitution  was  not  even  debated.^ 

On  April  28  Senator  Brown,  of  Nebraska,  had  proposed 
an  amendment  in  the  following  words  :    "  Congress  shall  have 
power  to  lay  and  collect  ta.xes  on  incomes  and  inheritances, 
from  whatever  sources  derived,  without  apportionment  among 
the  states,  without  reference  to  any  census  or  enumeration." 
This  was,  however,  withdrawn,  and  it  was  not  until  June   17 
that  a  new  amendment  was  introduced  in  accordance  with 
the  understanding  with  the  leaders  of  the  House.     This  new 
amendment  read  as  follows:"  Congress  shall  have  power  to 
lay  and  collect  direct  taxes  on  incomes  without  apportionment 
among  the  se\'eral  states,  according  to  population."     It  was  re- 
ferred to  the  committee  on  finance,  and  reported  back  on  June 
28.     In  the  meantime  a  change  had  been  made,  striking  out 
the  word  "  direct "  and  inserting  the  words  "  from  whatever 
source  derived,"  so  that  the  amendment  now  read  :  "  Congress 
shall  have   power  to  lay  and  collect  taxts  on  income  from 
whatever  source  derived,  without  apportionment  among  the 
several  states,  and  without  regard  to  any  census  or  enumera- 
tion."    No  explanation  was  made  of  the  change,  and  when 
Senator  Aldrich  reported  the  amendment,  he  asked  to  have 
it  disposed  of  without  debate.     It  was  indeed  debated,  but 
the  discussion  was  exceedingly  slight.     In  the  House  the  dis- 
cussion was  a  little  longer,  but  still  occupied  only  four  hours, 
and  one  of  the  members  protested  in  the  following  words  : 
"I    imagine  that  nothing  which  I  may  be  able  to  say  will 
defeat  the  prearranged  programme,  and  prevent  the  passage 
of  the  joint  resolution  ;  but  for  the  House  to  perform  its  part 
in  such  a  .solemn  transaction  as  amending  the  Constitution  of 
the  United  States  without  having  the  form   of   the  amend- 
ment seriously  considered  by  one  of  its  committees,  strikes 


m 


u 


.vniyanoH-ti 


i,,  pp.  4100.4120. 


V  5 

l<   '■ 
It-   I 


596 


T/tg  Income  Tax 


me  as  a  proceeding  of  extraordinary  levity."  >  Nothwithstand- 
ing  tiiis  protest,  however,  the  joint  resolution  (no.  40)  was 
passed  by  the  Senate  on  July  5,  by  unanimous  vote,'  and 
in  the  House  a  week  later  by  the  overwhelming  vote  of  318 
to  14.* 

Thus  the  amendment  started  on  its  way.  In  the  following 
winter,  as  the  legislatures  of  several  of  the  states  convened, 
the  path  seemed  to  be  clear  to  an  acceptance  of  the  amend- 
ment, when  the  country  was  startled  by  a  message  of  the 
reform  governor,  Hughes,  to  the  legislature  of  New  York, 
objecting  to  its  passage. 

In  the  judgment  of  Governor,  now  Justice,  Hughes,  the 
power  to  levy  an  income  tax  ought  assuredly  to  be  given  to 
the  national  government,  but  the  amendment  proposed  by 
Congress  labored  under  the  fatal  defect  that  it  would  em- 
power the  federal  legislature,  by  taxing  state  and  municipal 
bonds,  to  strike  at  the  very  vitals  of  state  credit  and  state  in- 
dependence.* 

Justice  Hughes  is  so  excellent  a  lawyer  and  so  great  a 
statesman  that  his  opinion  is  not  lightly  to  be  controverted. 
But  in  our  judgment  it  is  erroneous  in  three  respects  : 

(1)  His  interpretation  of  the  legal  force  of  the  amendment 
is  incorrect. 

(2)  Even  were  his  legal  interpretation  correct,  he  fails  to 
take  account  of  economic  facts  which  would  prevent  the  con- 
sequences which  he  fears. 

(3)  Even  were  his  view  correct,  that  the  constitutional 
amendment  would  operate  to  change  the  law  in  the  direction 
indicated,  there  are  valid  reasons  why  the  law  should  be  so 
changed  and  the  amendment  prevail. 

Let  us  take  up  each  of  these  points  in  order. 

1  Mr.  McCall,  of  Massachusetts,  in  Congrestional  Record,  vol.  44.  part  iv 
P-  4.W 

••'  Op.  at.,  p.  4.21.  3  o/.  <•//.,  p.  4440. 

*  Speci„l  Afessage  from  the  Governor  uihmitti,,^  to  the  /.eghLiture  „  Certified 
Copy  of  ,t  K,'^ol„tum  of  Conferees  entitlnl,  "  Joint  Resolution  proposing  an  Amend- 
,::.,;)  ;.:  M,-  /-.;;,,';/,-,•,',,.,,  ;y  /.'.,,.  i'rnlcj  .-iiatii."     Aliwny,  ly|o. 


The  Proposed  Hixteenth  Amendment 


597 


§  2.    The  Meaning  of  the  Amendment 

A  long  series  of  decisions  has  established  the  doctrine  that 
there  are  limitations  implied  as  well  as  expressed  upon  the 
power  of  taxation,  both  of  the  federal  and  of  the  state  ^Govern- 
ments.    In  the  case  of  McCulloch  vs.  Maryland.'  decided  in 
1819.  it  was  held  that  a  state  tax  on  the  Bank  of  the  United 
States  was  unconstitutional.     Chief  Justice  Marshall,  in  this 
case,  stated :  "  That  the  power  to  tax  involves  the  power  to 
destroy ;  that  the  power  to  destroy  may  defeat  and  render 
useless  the  power  to  create  ;  that  there  is  a  plain  repugnance 
m   conferring  on   one  government   a  power  to  control  the 
constitutional  measures  of  another,  which  other,  with  respect 
to  those  very  measures,  is  declared  to  be  supreme  over  that 
which  exerts  the  control,  are  propositions  not  to  be  denied. 
...   The  states  have  no  power,   by   taxation  or  otherwise, 
to  retard,  impede,  burthen,  or   in  any  manner   control,  the 
operations  of  the  constitutional  laws  enacted  by  Congress  to 
carry  into  execution  the  powers  vested  in  the  general  govern- 
ment." 

A  few  years  later,  in  1824,  the  same  proposition  was  ad- 
vanced in  the  case  of  Osborn  vs.  United  States  Bank.^     The 
next  step  was  taken  in  1829,  when,  in  the  case  of  Weston  vs. 
Charleston,*  a  local  tax  on  federal  bonds  was  declared  un- 
constitutional.    The  court  said  :    "  The   tax  on  government 
stock  is  a  tax  on  the  contract,  a  tax  on  the  power  to  borrow 
money,  on  the  credit  of  the  United  States,  and  consequently 
repugnant  to   the  Constitution.  ...     The  right  to  tax  the 
contract  to  any  extent,  when  made,  must  operate  upon  the 
power  to  borrow  before  it  is  exercised  and  have  a  sensible 
influence  on  the  contract.     The  extent  of  this  influence  de- 
pends upon  the  will  of  a  distinct  government.     To  any  ex- 
tent, however  inconsiderable,  it  is  a  burthen  on  the  operations 
of  government."     Again,  in  1842,  in  the  case  of  Dobbins  vs. 
Commissioners  of  Erie  County,*  it  was  held  that  a  local  tax 


'  4  Wheaton,  316. 
»  9  Wheaton,  738. 


'  2  Peters,  449. 
*  16  Peters,  435. 


I?-    I 


59« 


The  Income  Tax 


was  invalid  so  far  as  the  salaries  of  federal  officers  were 
concerned.  And  finally,  in  .862.  in  the  case  of  Bank  of 
Commerce  vs.  City  of  New  York,'  it  was  decided  that  a  state 
tax  on  the  capital  stock  of  a  bank,  when  such  capital  stock 
consisted,  in  whole  or  in  part,  of  United  States  bonds,  was 

unconstitutional.  ,   ,     •  •        j 

BcRinninK  at  a  later  period,  another  series  of  decisions  de- 
clared that  the  federal  government  was  likewise  restrained 
from  taxing  stare  operations  and  agencies.     In  the  case  of  Col- 
I     tor  rs.  Day ,»  decided  in  1870,  the  federal  Civil  War  income 
t  IX  was  held  to  be  unconstitutional  so  far  as  it  applied  to 
the  salaries  of  state  judicial  officers.     The  court  said  :  "It 
is  admitted  that  there  is  no  express  provision  in  the  Constitu- 
tion that  prohibits  the  general  government  from  taxing  the 
means  and  instrumentalities  of  the  states,  nor  is  there  any 
prohibiting  the  states  from  taxing  the  means  and  instrumen- 
talities   of   that  government.     In  both  cases  the  e.xemption 
rests  upon  necessarv  implication,  and  is  upheld  by  the  great 
law  of  self-preservation  ;  as  any  government,  whose  means 
employed  in  conducting  its  operations,  if  subject  to  the  con- 
trol  of  another  and  distinct  government,  can  only  exist  at  the 
mercy  of  that  government.     Of  what  avail  are  these  means 
if  another  i>ower  may  tax  them  at  discretion .' " 

In  United  States  vs.  Baltimore  and  Ohio  Railroad  Company, 
decided  in  1872,  it  was  held  that  the  United  States  govern- 
ment  cannot   tax  "the   agencies    and  instruments"  of   the 
states      In  Mercantile  Bank  vs.  New  York,*  decided  m  .886 
which  held  that  a  state  tax  on  the  shareholders  of  national 
banks  was  valid  for  special  reasons,  not  necessary  here  to 
discuss,    it   was   stated,  although   indeed  obiter,  that   bonds 
issued   by   a   state,   "or   under   its   authority  by   its   public 
municipal   bodies,  are   means  for   carrying  on  the  work  of 
government,  and  are  not  taxable  even  by  the  U  lited  States. 
And  finally,  in  Pollock  vs.  Farmers'  Loan  and  Trust  Com- 
pany,^^  decided  in  1895.  the  foregoing  dictum  was  cited  with 

6  157  US.,  429- 


1  2  lilack,  620. 
■i  II  Wallace,  1 1 3. 


"  1 7  Wallace,  523. 
<  121  U.S.,  138. 


The  Proposed  Sixteenth  Amendment         599 

approval,  and  it  was  distinctly  held  that  a  tax  upon  incomes 
from  municipal  bonds  was  unconstitutional.  The  court  said : 
"  It  was  long  ago  determined  that  the  property  and  reve- 
nues of  municipal  corporations  are  not  subjects  of  federal 
taxation  The  same  want  of  power  to  tax  the  property  or 
revenue  of  the  states  or  their  instrumentalities  exists  m 
relation  to  a  tax  on  the  income  from  their  securities.!  ••  u  is 
accordingly  an  established  rule  of  constitutional  interpreta- 
tion that  state  and  municipal  bonds  are  not  subject  to  federal 

taxation.  .  , 

The  question  which  now  confronts  us  is  :  Will  the  adop- 
tion  of   the    proposed   amendment   change    this    situation? 
The  amendment  states  that  Congress  "  shall  have  power  to  lay 
and  collect  taxes  on  income,  from  whatever  source  derived, 
without  apportionment  among  the  several  states,  and  with- 
out regard  to  any  census  or  enumeration."     What  does  this 
tnean>     It  is  obvious  that  the  government  now  has   power 
to  levy  an  income  tax;  but  in  attempting  to  levy  such  a  tax 
it  is  met  by  those  provisions  of  the  constitution  which  de- 
clare, first,  that  "  no  capitation  or  other  direct  tax  .shall  be  laid 
unless  in  proportion  to  the  census  or  enumeration  hereinbe- 
fore directed  to  be  taken";  and  secondly,  that  "representa- 
tives and  direct  taxes  shall  be  apportioned  among  the  several 
states  according  to  their  respective  numbers."     If  these  pro- 
visions apply  to  the  taxation  of  income,  they  mean  that  if 
state  A,  with  the  same  population  as  state  B.  has  five  times 
the  wealth,  the  income  tax  payable  by  a  citizen  of  state  B  will 
be  five  times  as  large  as  that  payable  by  an  equally  wealthy 
citizen  of   State  A.     So  monstrous  an    inequality  would,  ot 
course,  prevent  Congress  from  imposing  an  income  tax  as  a 
direct  tax      To  make  a  federal  income  tax  practicable,  it  is 
necessary  cither  to  declare  it  to  be  an  indirect  tax,  -the  sole 
restriction  as  to  which  is  that  it  shall  be  uniform. -or  e.x- 
pressly   to   permit   the   levying   of   an   income   tax   without 

apportionment. 

For  many  years  the  income  tax  was  supposed  to  be  an  in- 

I  157  U.S.,  \>\>.  5S4,  5S5. 


l^Sf^RTK 


^<;i^£^^d^£i'mLii 


6oo 


Tiie  Incomt  Tux 


direct  taxln  the  scn.sc  in  which  the  term  is  used  i„  the  consti- 
tution.     Toward  the  close  of  the  War  of  1812.  the  secretary 
of  the  treasury,  as  we  itnow.  brought  in  a  scheme  for  an  in- 
come  tax  and.  had  peace  not  been  suddenly  declared,  the 
scheme  would  have   been   adopted.      Many  signers  of  the 
constitution  were  still  living,  and  no  one  raised  the  objection 
that  the  income  tax  was  direct  in  the  constitutional  sense. 
During  the  Civil  War  the  income  tax  was  levied,  as  wo  remem- 
ber.  precisely  for  the  reason  that  it  was  not  a  direct  tax,  and  in 
order  to  obviate  the  necessity  of  a  direct  tax.  levied  by  appor- 
tionment.    This  Civil  War  tax  moreover  was  upheld  in  the 
first  cases  adjudicated.     Taking  each  of  these  cases  as  de- 
cisive only  of  the  precise  question  before  the  court,  it  was 
settled  in  Pacific  Insurance  Company  vs.  Soule'  that  a  tax 
on  the  premiums  received  by  an  insurance  company  is  not  a 
direct  tax.  and  in  Springer  vs.  United  States'  that  a  tax  on 
the  income  which  an  individual  derives  in  part  from  profes- 
sional  earnings  and  in  part  from  the  interest  on  bonds  is  not 
a  direct  tax.     In  the  Pollock  ca.se.3  on  the  other  hand.  It  was 
decidec    that  a  tax  on  the  income  from  real  estate  is  a  direct 
tax.  valid  only  when  apportioned,  while  a  tax  on  municipal 
bonds  was  declared  to  be.  like  a  tax  on  the  salaries  of  state 
officers,  entirely  invalid  for  lack  of  power  to  impose  it. 

The  .supreme  court  of  the  United  States  has  thus  held  that 
certain  kmds  of  income  taxes  are  indirect,  that  certain  other 
kinds  of  income  taxes  are  direct,  and  that  still  other  kinds  of 
income  taxes  are  invalid,  irrespective   of   whether  they  are 
direct  or  indirect.     So  far  as  the  first  two  classes  are  con- 
cerned, therefore,  the  court  has  stated  the  law  to  be  that  a 
ax  on  incomes  from  certain  sources,  being  direct,  can   be 
levied   only  through  apportionment,  and  that  a  tax  on  in- 
comes from  other  sources,  being  indirect,  can  be  levied  with- 
out apportionment.     The  object  of  the  pending  constitutional 
amendment  ,s  simply  to  remove  this  discriminaticm  and  to 
make   it   possible   to   tax   incomes    without    apportionment, 

\  7  Wallace,  4,3  (,,868).  .  ,57  y.S..  429  (1894). 


The  Proposed  Sixteenth  Amendment        6oi 

whether  the  sources  of  the  incomes  are  regarded  as  fall- 
ing within  the  one  category  or  the  other.  That  is,  the 
amendment  declares  that  an  income  tax  can  henceforth  be 
levied  without  apportionment,  no  matter  what  the  source 
may  be,  i.e.,  no  matter  whether  the  source  is  one  that  at  pres- 
ent necessitates  apportionment  or  one  that  at  present  does 
not  necessitate  apportionment.  When  the  amendment  states 
that  the  government  shall  have  power  to  levy  a  tax  "  on  in- 
comes, from  whatever  source  derived,  without  apportion- 
ment," chief  emphasis  is  to  be  put  upon  the  words  "  without 
apportionment."  The  words  "  from  whatever  source  derived  " 
are  indeed  no  mere  surplusage.'  On  the  contrary,  their  real 
import  is  to  remove  the  exi.sting  discrimination  between  the 
various  sources  of  income,  so  far  as  apportionment  is  con- 
cerned, and  to  put  those  sources  which,  under  the  existing 
interpretation,  can  be  ta.xed  only  through  apportionment  in 
the  same  category  as  those  sources  which  can  now  be  taxed 
without  apportionment.  To  say  "from  whatever  source  de- 
rived "  is  simply  another  way  of  saying  "  irrespective  of  the 
source,"  or  a  shorter  way  of  saying  "  from  all  sources  alike, 
whether  the  source  be  one  that  previously  made  apportion- 
ment necessary  or  not."  So  th.it  the  amendment  is  equiva- 
lent to  the  statement  that  "  Congress  shall  have  power  to  lay 
and  collect  a  tax  on  incomes,  whether  previously  laid  by  ap- 
portionment or  not,  without  apportionment."  It  is  accord- 
ingly a  mistake  to  a.ssume  that  the  words  "from  whatever 
source  derived  "  give  the  government  the  power  to  tax  the 
income  from  state  or  municipal  bonds,  for  such  a  tax  falls 
within  the  third  category  of  income  taxes  mentioned  above  as 
being  entirely  beyond  the  ta.xing  power  of  the  federal  gov- 
ernment. 

'  It  is  here  that  I  venture  to  differ  from  the  position  taken  liy  Senator  Root  in 
hii  letter  to  Senator  Davenport  of  New  York  (,ii  the  iMLoiue  tax.  Cf.  l lit  l.flter 
of  Unile.l  Statfs  Stnuti^r  A'cot  on  the  Inconit  Tax  Amtn./menI  -urttlfn  to  Semilor 
Darrnf'orl.  J'menteil  hy  Seniit,'r  /hirvnfttrt  to  the  Seihttf  iiii.t  lea.l  tiho  iii  tht 
Assembly.  1910,  13  pp.  Senator  Root  contemls  that  the  phrase  "from  what- 
ever :i;jur;;c  >;cr;vc-I  *  i.>  inn-'i  i.wu.»,  i>t»..iU''e  invic  ?»uii'iu>  .^e.  liie  pi'Miil  limpter 
it  may  be  well  to  state,  was  written  helore  the  appearance  of  Senator  Root's  letter. 


603 


Tlu  Income  Tax 


H 


This  has  been  clearly  recognized  by  the  supreme  court. 
In  the  rcilliKk  case'  it  was  expressly  held  that  the  objection 
to  the  taxation  of  municipal  bonds  was  lack  of  power  on  the 
part  of  the  general  government  to  interfere  with  the  opera- 
tiims  of  state  government.'^  When  the  Pollock  case  was  re- 
heard,^ the  court  said,  in  reference  to  the  grounds  of  the 
decision  in  the  original  hearing :  "  As  to  the  income  from 
municipal  bonds,  that  could  not  be  taxed  because  of  want  of 
power  to  tax  the  source,  and  no  reference  was  niado  to  the 
nature  of  the  tax  as  being  direct  or  indirect."  *  Hoth  on  the 
original  hearing  and  on  the  rehearing,  dissenting  ojjinions 
were  read,  but  on  the  point  which  we  arc  now  considering 
there  was  no  dissent.  Justice  White  said:  "The  decisions 
of  this  court,  holding  that  the  federal  government  is  with- 
out power  to  tax  the  agencies  of  the  state  government,  em- 
brace such  bonds  [/.<•.,  those  of  municipal  corporations].  .  .  . 
Where  there  is  no  power  to  tax  for  any  purpose  whatever 
no  cHrect  or  indirect  tax  can  be  imposed.  ...  T'  e  levy 
whether  direct  or  indirect,  is  beyond  the  taxing  power."* 

Justice  Harlan,  who  concurred  with  the  views  expressed  by 
Justice  White,  added  :  "  It  is  immaterial  to  inquire  whether 
the  tax  [on  the  income  of  muiiici|ial  bonds]  is,  in  its  nature 
or  by  its  operation,  a  direct  or  an  indirect  tax ;  for  the  instru- 
mentalities of  the  states  .  .  .  are  nut  sub'-icts  of  national  tax- 
ation in  any  form  or  for  any  purpose.""  And  Justice  Brown 
stated  that  a  tax  upon  the  income  of  municipal  bonds  was,  in 
his  opinion,  a  "tax  upon  something  which  Congress  has  no 
right  to  tax  at  all,  and  hence  is  invalid.  Here  is  a  question, 
not  of  the  method  of  taxation,  but  of  the  power  to  subject  the 
property  to  taxation  in  any  form."' 

It  is  clear,  therefore,  that  a  change  in  the  method  of  as- 
sessing an  income  tax,  from  that  of  apportionment  to  that  of 
direct  levy  cannot  make  any  difference  as  to  the  power  of 
the  government  to  tax  the  income  of  state  or  municipal  bonds. 


»  1 57  U.S.,  .^29. 

•  .•.-.-..-.,  j'.i>.  5.14,  305. 

"  158  U.S.,  601. 


<  Ihi.l.,  p.  618. 
-  IS7  U..-i..  t;;2 


'  158  U.S.,  693. 


IbiJ.,  p.  654. 


TISIS^ 


^f^^^^i^^^^^'. 


The  Proposed  SixUeuth  Amendment         603 

If  the  federal  -(.vernrnent  is  precluded  by  the  very  nature  of 
the  constitutional  pact,  as  we  are  told  in  Collector  vs.  Day, 
from  imposing  any  lax  on  state  a-encics.  power  to  do  this 
will  not  be  conferred  upon  it  by  an  amendment  which  simply 
changes  the  method  of  levying  a  particular  kind  of  tax. 
What  is  now  non-taxable  will  remain  non  taxable.  A  change 
in  the  method  of  taxation  does  not  c,  .  titute  a  change  in  the 

subject  of  taxation. 

Any  other   interpretation   of   the   amendment,   moreover, 
would  result,   in  the  event  of   its  adoption,   in   a   situation 
which  may  well  be  characterized  as  absurd.     The  existing 
inability  r.f  the  federal  government  to  tax  the  property  of  a 
state  or  the  instrume.italities  of  its  government  will  of  course 
continue,  for  the  amendment  cle.r^-  does  not  empower  Con- 
gress to  tax  property  as  such.     It  it  were  to  be  held  that  the 
amendment  gave  the  federal  government  power  to  tax  the 
income  of  state  bonds,  we  should  then  have  the  awkward  re- 
sult that  the  federal   government  could   not   tax  the   bonds 
themselves  but  could  tax  the  income  from  the  bonds.     Or. 
to  take  a  still  more  absurd  case,  if  a  state  or  municipality 
possessed    some   revenue-yielding   property,  like  a  piece  of 
real  estate,  it  would  be  competent  for  the  federal  government 
to  tax  that  real  estate  if  it  assessed  the  tax  eo  nommc  on  the 
income,  while  it  would  be  incnmi.etent  for  the  federal  gov- 
ernment to  tax  the  real  c.tate  if  the  tax  were  levied  on  the 
property  as  such.     In  view  of  the  fact  that  the  market  value 
of  anv  piece  of  property  is  due  only  to  its  present  and  pro- 
spective income,  it  will  readily  be  perceived  in  wh  ,t  a  maze 
of  contradictions  we  should  be  involved  by  the  acceptance  of 
so  strained  an  interpretation  of  the  amendment.     When  two 
interpretations  of  a  clause  are  possible,  of  which  the  one  is 
not  only,  as  the  s.ipreme  court  has  asserted,  in  direct  opi^si- 
tion  to  the  spirit  of  the  constitution,  but  is  also  calcula  ed  to 
bring  about  the  most  awkward  practical  situation^wh,  e  the 
other  is  in  complete  harmony  with  the  trend  of  judic.a    deci- 
sions and  at  the  same  time  is  likely  to  obviate  all  fear  of  fiscal 

1  M  Wallace.  113. 


c.-- 


m\^  - 


6o4 


Tfie  Income  Tax 


w 


contrad.ct.ons  or  complications,  is  it  not  reasonable  to  assum. 
tha   the  court  w.ll  prefer  the  second  and  more  natural  inter^ 
pretation  ?     Such  an  interpretation  is  the  one  which  put,  the 
emphasis  on  the  words  '<  without  apportionment."  and  regards 
the  amendment  as  legalizing;  a  change  simply  in  the  mc.hod 
alseZeT      ^^^~^  ^'^"^^  '^""^  apportionment  to  direct 
VVe  are  therefore  justified  in  concluding  that  the  essential 
character  of  the  .mplicd  restrictions  in  the  constitution  will 
not  be  altered  one  whit  by  the  amendment.     State  and  mu- 
n.c.pa    bonds  will  henceforth,  as  before,  be   exempt  from 
federal  taxation,  whether  the  tax  be  imposed  on  the  property, 
or  whether  it  be  imposed  on  the  income  from  the  property 

§  3-  The  Effect  on  the  Borroxving  Power  of  the  States 
If  now.  for  the  sake  of  argument,  it  be  assumed  that  the 
contrary  view  is  legally  correct,  and  that  the  effect  of  the  pro- 
posed constitutional  amendment  would  be  to  legalize  the  tax- 
ation  of  state  and  municipal  bonds,  it  may  still  be  shown  that 
the  consequences  mentioned  in  the  message  of  Governor 

^'  r "''"-;  ^""°--  ^^«  -  ^"'<i  thatihe  amendm" 
n..ght  'place  the  borrowing  capacity  of  the  state  and  of  its 
governmental  agencies  at  the  mercy  of  the  federal  taxing 
po^er.  and  that  .t  might  "place  such  limitations  upon  thf 
borrowing  power  of  the  state  as  to  mak.  the  perfornunce  of 
the  functions  of  local  government  a  matter  of  federal  grace  " 
This  opinion,  as  I  hope  to  show,  is  erroneous,  and  the  error 
s  traceable  to  the  lack  of  an  adequate  economic  analysis  on 
the    part   of  the   governor -an   analysis,  indeed,  which   is 

'Z    \       T  "■""'  '^"^  ''^*'^'  '^'^'^'^'""^  -^■■'^h  have  misled 

h»m.     In  other  words,  even  if  the  governer's  law  be  sound 

his  economic  reasoning  is  unsound,  and  his  final  position  is 

till  untenable.     Let  us  leave  for  a  time  the  whole  Soma'o 

jtTT'""  T'  '""^"^^  '""^  ^"-^'-  «^  the  economic 
ettect  of  the  amendment. 

Tne  objection  to  a  tax  on  governmental  securities  rests  on 


k 


The  Proposed  Sixteenth  Amendment         605 

the  presumption  that  their  market  value  will  be  affected  by 
the  tax.  As  the  supreme  court  said  in  1829,  in  Weston  vs. 
Charleston :  ^  "  The  tax  on  government  stock  is  a  tax  on  the 
contract,  a  tax  on  the  power  to  borrow  money,  on  the  credit 
of  the  government.  .  .  .  The  right  to  tax  the  contnct 
to  any  extent,  when  made,  must  operate  upon  the  power 
to  borrow  before  it  is  exercised,  and  have  a  sensible  influ- 
ence on  the  contract."  Of  course  this  sensible  influence  on 
the  contract  can  register  itself  only  in  the  lower  market  price 
of  the  securities.  This  is  the  result  of  the  familiar  eco- 
nomic principle  known  as  the  capitalization  or  amortization 
of  taxation. 

The  theory  of  the  capitalization  of  taxation  is,  in  effect, 
that  when  a  recurring  tax  of  virtually  the  same  amount  is 
imposed  upon  the  capital  or  selling  value  of  some  durable  or 
permanent  property,  th»  selling  value  of  that  property  will  be 
rer  "ed  by  a  sum  equal  to  the  capitalization  of  the  tax."-*  If,  for 
ins.  .;ice,  the  normal  rate  of  interest  on  securities  is  five  per 
cent,  and  a  five  per  cent  bond  has  been  selling  at  par,  and  if 
a  new  tax  of  one  per  cent  per  annum  be  imposed  upon  that 
particular  class  of  securities,  the  price  of  the  bond  will  fall 
from  icx)  to  about  80.^    The  new  purchaser  of  the  bond  will 

*  3  Peters,  449. 

=  The  wholt;  subject  of  the  capitalization  of  taxation  is  fully  treated  in  S,  li^;- 
man,  The  Shifting anJ huidince  of  Tuxation,  3d.  ed.,  1910. 

*  As  a  matter  of  fact,  whether  the  price  of  the  security  upon  which  the  new  tax 
is  imposed  will  fall  exactly  to  So  depends  very  largely  upon  the  amount  of  these 
securities,  compared  with  the  total  amount  of  capital  in  the  country,  If  the 
amount  of  these  newly  taxable  securities  is  comparatively  larjje,  ihe  price  will  not 
fall  quite  to  80,  but  i)crhaps  only  to  81 ;  for  the  imposition  of  a  t.ix  on  so  large  a 
part  of  the  outstanding  capital  of  the  country  will  prolialily  have  an  inlluencc, 
even  though  slight,  on  the  general  rate  i.f  interest,  .ind  may  reduce  that  general 
rate  fiom  live  per  cent  to  perhaps  four  and  seven-eightii>  or  four  ami  fifteen- 
sixteenths.  If  a  large  amount  of  capital  is  transferreil  from  these  newly  taxed 
bonds  to  other  securities,  the  increasing  demand  for  these  other  securities,  pre- 
viously selling  at  par,  will  enhance  their  price  to  a  little  above  par.  .\s,  however, 
the  net  return  on  these  other  securities  remains  at  live  dollars,  this  is  ei|uiv.ilent 
to  saying  that  the  rate  of  interest  on  the  investment  will  now  be  a  little  below  live 
per  cent.  If  the  general  rate  of  interest  falls  to  a  little  below  live  per  cent,  the 
market  value  of  the  tnxed  ^^ .  uritU-  ■■■■  ill  nvw  be  ;\  little  over  So.     If,  ;ti  h  u^uaiiy 


6o6 


The  Income  Tax 


m 


ii- 


net  only  four  dollars  on  the  hundred,  since  he  has  to  pay  one 
dollar  in  taxes.  If,  however,  he  can  look  forward  to  a  net 
return  of  only  four  dollars,  and  if  the  general  rate  of  interest 
still  remains  at  five  per  cent,  he  will  naturally  pay  only  eighty 
dollars  for  that  bond.  There  is  no  reason  why  he  should 
pay  more,  since  he  can  continue  to  invest  his  money  in  enter- 
prises which  are  not  taxed  and  which  will  still  net  him  five 
per  cent.  In  other  words,  the  annually  recurring  tax  of  one 
per  cent  will  be  capitalized  into  a  sum  which  is  automatically 
deducted  from  the  market  value  of  the  securities,  thus  bringing 
about  an  amortization  of  these  securities.  At  any  given  time 
the  discrepancy  between  the  taxed  and  the  untaxed  securities 
will  be  precisely  such  as  to  make  the  net  income  from  each 
equal  the  normal  rate  of  interest,  and  the  difference  in  the 
market  value  of  the  two  classes  of  securities  will  always  be 
exactly  equal  to  the  capitalization  of  the  tax. 

The  influence  of  tax  e>..mption  is  the  very  reverse  of  that 
exercised  by  taxation.  If  all  securities  have  hitherto  been 
subject  to  taxation,  and  if  one  particular  class  of  securities  be 
suddenly  exempted,  the  value  of  these  tax-exempt  securities 
will  rise  by  an  amount  equivalent  to  the  capitalization  of  tax. 
If  five  per  cent  bonds,  like  all  other  forms  of  capital  that  are 
subject  to  a  tax  of  one  per  cent,  should  sell  at  par,  it  means 
that  the  normal  rate  of  interest  is  four  per  cent,  since  investors 
net  four  dollars  on  every  hundred  dollars.  If  this  particular 
class  of  bonds  be  now  exempted  from  taxation,  the  price  of 
the  bonds  will  appreciate  to  125,  since  five  dollars  bear  the 
same  relation  to  $125  as  four  dollars  do  to  gioo.  Thus, 
whatever  way  we  look  at  it,  taxation  will  diminish  the  market 
value  of  bonds  just  as  exemption  will  increase  their  market 
value. 

Where  an  annual  tax  is  actually  enforced,  and  where  other 
conditions  remain  the  same,  the  difference  between  taxable 
and  non-taxable  securities  is  indeed  precisely  in  accord  with 

the  case,  the  taxed  security  forms  (iiily  an  insignificant  part  of  tlie  whole  amount 
of  capital,  the  influence  on  the  general  rote  of  interest  will  be  inappreciable,  and 
the  price  of  the  secu.ity  will  tall  to  So. 


.a 


The  Proposed  Sixteenth  Amendment         607 


the  capitalization  theory.'  In  the  United  States,  however, 
the  influence  of  taxation  is  sensibly  modilied  by  prevailing 
conditions,  and  the  discrepancy  between  taxable  and  non-tax- 
able bonds  is  far  less  than  might  be  expected.  The  rate  of 
the  local  property  tax  varies  in  the  United  States  from  one 
and  one-half  per  cent  to  over  two  per  cent.  Let  us  take  two 
per  cent  as  the  normal  figure.  Let  us  also  assume  that  the 
current  rate  of  interest  is  four  per  cent,  so  that  four  per  cent 
bonds  will  sell  at  about  par.  If  there  were  no  property  tax, 
and  if  these  bonds  were  now  subjected  to  the  two  per  cent  tax, 
they  would  manifestly  fall  to  50,  since  one-half  of  their  yield 
would  be  eaten  up  by  the  tax.  If,  on  the  other  hand,  we 
take  the  actual  law  under  which  all  property  is  taxable  at  the 
rate  of  two  per  cent,  then  if  the  four  per  cent  bonds  were  ex- 
empted from  taxation  their  price  on  the  market  ought  to  rise 
from  par  to  200 ;  for  instead  of  the  holder  netting  two  dollars 
on  each  one  hundred  dollars  (four  dollars  interest  minus  two 
dollars  tax),  he  would  now  net  four  dollars,  or  double  the 
amount.  A  doubling  of  the  income,  however,  would  involve 
a  doubling  of  the  market  value. 

As  a  matter  of  fact,  the  disparity  between  taxable  and  tax- 
exempt  securities  in  our  American  states  falls  far  short  of 
reaching  this  point.  This  is  true  not  only  of  exemption  from 
a  special  tax,  but  and  in  still  larger  measure,  of  exemption 
from  a  general  tax.  A  good  example  of  the  influence  of  a 
special  exemption  is  afforded  by  the  New  York  State  canal 
bonds.*     When  these  bonds  were  authorized,  to  provide  for 


I  A 


%\ 


'  An  excellent  illustration  is  found  in  the  mortgage  bonds  of  the  Northern 
Railway  in  Frame,  part  of  wliich  arc  issued  un  its  French  line  and  part  on  the 
Belgian  stretch,  although  the  security  is  the  same  in  both.  In  tl.c  case  of  the 
bonds  on  the  French  stretch,  however,  a  special  tax  is  imposed  and  levied  up  to 
the  hilt  by  the  French  government.  In  the  case  of  tlie  securities  of  tlie  Helgian 
stretch  there  is  no  such  tax.  The  difference  in  the  market  price  of  the  bonds,  on 
the  Paris  stock  exchange,  is  exactly  c  juivalent  to  a  capitalization  of  the  French 
tax.     Cf.  Fdgar  Milliaud,  I.' Imposition  lit  A.  Kente.     I  aris,  i<;o8,  pp.  29,  30. 

*  For  many  of  the  facts  in  this  section  I  am  indebted  t<>  the  courtesy  of  Mr. 
McKee,  of  Messrs.  N.  \V.  Harris  and  Company,  of  New  York  City,  one  of  the 
largest  .\nicrican  houiici  dealing  In  state  municipal  sccuriiiv:^. 


6o8 


The  income  Tax 


rl^ 


if 


.1 


the  enlargement  of  the  Erie  Canal,  the  constitutional  amend- 
ment iimitcci  the  rate  of  interest  to  three  per  cent,  liy  the 
time  that  it  had  become  necessary  to  issue  the  bonds,  the 
market  had  fallen  to  such  a  point  that  they  were  not  salable, 
and  in  order  to  change  the  rate  another  constitutional  amend- 
ment became  necessary.  To  arrange  for  the  state  finances  in 
the  interval,  r  law  was  passed  granting  to  the  three  per  cent 
bonds  a  special  exemption  of  one  per  cent,  to  be  applied 
against  the  franchise  tax  of  similar  amount,  payable  by  sav- 
ings-banks, trust  companies  and  insurance  companies.  The 
three  per  cents,  as  a  result,  sold  around  a  2.90  per  cent  basis, 
and  the  four  per  cents  around  a  3.45  per  cent  basis.  Even 
here,  therefore,  the  difference  in  the  price  of  the  bonds  was 
only  about  one-half  of  the  capitalization  of  the  tax. 

The  ca3'-  of  general  exemption  is  illustrated  in  Massachu- 
setts. In  that  state  all  municipal  bonds  issued  after  May  r, 
1908,  are  e.xempt  from  taxation.  The  old  taxable  three  and 
one-half  per  cent  Boston  bonds  sold  in  1910  in  Massachusetts 
on  about  a  3.80  per  cent  basis,  the  new  tax-exempt  bonds  sold 
on  about  a  3.40  per  cent  basis,  i.e.,  at  101.83  ^s  compared  with 
94.76.  The  tax  rate  was  about  1.65,  almost  one-half  of  the 
income  of  the  bonds.  In  other  words,  a  tax  exemption  of 
almost  fifty  per  cent  of  income  made  a  difference  of  only 
seven  per  cent  in  selling  value.  Even  this  difference,  more- 
over, is  largely  due  to  the  fact  that  the  chief  purchasers  of 
Boston  bonds  a^e  the  Massachusetts  savings-banks,  which  are 
subject  to  a  fixed  tax  of  one-half  of  one  per  cent  —  a  tax  that 
is  collected  with  comparative  efficiency. 

Where  the  bonds  command  a  wider  market,  the  influence 
of  tax  exemption  is  natunilly  far  less  marked,  because  the  ex- 
emption applies  only  within  the  state.  In  Pennsylvania,  for 
instance,  bonds  are  subject  to  a  tax  of  four  mills  on  the  dol- 
lar, and  some  corporations  and  municipalities  pay  the  tax 
without  deductmg  it  from  the  interest.  In  the  case  of  the 
smaller  municiinilitios,  whose  bonds  are  sold  only  locally  or 
within  the  state,  this  tax  produces  a  difference  in  price  be- 
iwccii  t.t.\.ab:c  and  tax-exempt  bonds,  but  a  difference  that  is 


The  Proposed  Sixteenth  Amendment        609 


far  less  than  a  capitalization  of  the  tax.  In  the  larger  cities, 
however,  like  Philadelphia,  Pittsburg  and  Scranton,  where  the 
bonds  are  a  local  investment  for  New  York  savings-banks, 
and  thus  reach  a  wider  market,  the  difference  in  value  is  ex- 
ceedingly slight.  A  bond  which  sells  on  a  3.90  per  cent  basis, 
tax  exempt,  would  in  such  cases,  if  taxable,  sell  only  on  about 
a  four  percent  basis.  In  the  case  of  general  corporate  securi- 
ties which  have  a  still  wider  market,  the  difference  due  to 
tax  exemption  is  almost  inappreciable.  A  tax  security  selling 
at  100  will  frequently  compare  with  a  tax-exempt  security  at 
102  or  103  —  a  difference  which,  when  spread  over  the  years 
prior  to  the  maturity  of  the  bond,  represents  only  the  merest 
fraction  of  the  four  mills  tax. 

In  most  of  the  states,  however,  the  tax  rate  is  not  four  mills, 
as  in  Pennsylvania,  but,  as  stated  above,  from  one  and  one- 
half  to  two  per  cent.  Even  where  a  serious  attempt  is  made 
to  enforce  the  personal  property  tax,  as  was  formerly  the  case 
in  Ohio  with  its  tax  inquisitor  law,  the  only  result  is  that 
tax-exempt  bonds  —  Cincinnati  bonds,  for  instance— sell  on 
a  3.80  per  cent  basis  in  the  local  market,  while  in  the  general 
outside  market  they  sell  at  a  lower  price  —  namely  on  a  3.90 
or  3.95  per  cent  basis.  The  actual  tax,  or  the  risk  of  taxation 
of  two  per  cent,  hence  means  a  difference  of  only  a  few  points 
in  the  value  of  the  securities. 

Even  within  the  area  of  tax  exemption,  the  larger  the 
amount  of  the  tax  exempt  securities,  the  smaller  will  be  the 
difference  in  value  between  them  and  the  taxable  securities. 
In  New  York,  for  instance,  so  long  as  tax-exempt  bonds  were 
rare,  they  commanded  somewhat  of  a  premium  :  the  New 
York  City  two  and  one-half  per  cent  bonds  at  one  time  sold 
above  par,  because  they  were  much  sought  after  by  savings- 
banks,  trust  companies  and  insurance  companies,  in  order  to 
e-xape  the  franchise  tax.  Since  1908,  however,  all  municipal 
bonds  are  exempt  from  general  taxation  throughout  the 
state ;  and  the  result  has  been  a  progressive  disappearance 
of  the  difference  in  price  between  taxable  and  tax-exempt 
bonds.     ( >t  course  two  other  factors  have  been  cooperating  : 

2  k 


!| 


ri 


6io 


The  Income  Tax 


4' 


the  one,  that  the  market  in  New  York  City  bonds  now  trans- 
cends the  capacity  of  New  York  City  investors;  the  other, 
that  the  assessment  of  taxable  securities  in  the  hands  of  in- 
dividuals, under  the  local  general  property  tax,  is  becoming 
even  more  infrequent  than  it  was  formerly.  Undoubtedly, 
however,  the  chief  factor  in  the  progressive  elimination  of  the 
premium  on  tax-exempt  bonds  is  the  increase  in  their  quantity. 
It  is  instructive  to  note,  how,  through  the  inevitable  operation 
of  economic  law,  the  very  multiplication  of  tax-exempt  state 
and  municipal  bonds  is  gradually  defeating  the  object  of  the 
exemption.  The  greater  the  area  of  tax  exemption,  the  less 
does  its  influence  become. 

It  appears,  accordingly,  that,  under  present  American  con- 
ditions, exemption  from  a  tax  which  in  some  cases  amounts, 
nominally,  to  twenty  five  or  even  fifty  per  cent  of  the  income 
of  the  bonds  actually  makes  no  difference  in  their  market 
value,  or  a  difference  so  slight  as  to  be  negligible.  This  at 
least  is  the  result  of  the  exemption  of  state  and  municipal 
bonds  from  the  general  property  tax,  as  levied  in  the  American 
states.  Let  us  now  consider  the  bearing  of  this  fact  upon 
the  results  to  be  anticipated  from  the  imposition  of  a  federal 
income  tax. 

The  income  tax  contemplated  by  the  constitutional  amend- 
ment is  very  different  from  the  general  property  tax.  A  gen- 
eral property  tax  of  two  per  cent  is,  we  have  seen,  equivalent 
to  a  fifty  per  cent  income  tax,  if  the  prevailing  rate  of  interest 
is  four  per  cent.  The  federal  income  tax  of  1894  provided 
for  a  tax,  not  of  fifty  per  cent,  but  of  two  per  cent.  If  a  tax 
of  fifty  per  cent  makes,  as  we  have  seen,  virtually  no  differ- 
ence, what  significance  can  we  ascribe  to  a  tax  of  two  per 
cent .'  Even  if  we  assume  that  a  federal  income  tax  will  be 
more  effectively  enforced  than  a  state  general  property  tax, 
the  margin  is  still  so  enormous  as  to  rob  the  income  tax  of 
much  of  its  supposed  danger.  The  practical  effect  of  sub- 
jecting the  income  of  state  or  municipal  bonds  to  federal 
tax.ition  would  be  so  slight  as  to  render  the  ta.x  virtually 
innocuous. 


W^ml^S*S^^?^4M 


The  Proposed  Sixteenth  Amendment        6ii 

We  come  now,  however,  to  the  central  point  of  the  argument. 
In  the  entire  preceding  discussion  we  have  assumed  the  exist- 
ence of  an  exclusive  tax  or  of  a  special  exemption.  The  the- 
ory of  capitalization  or  amortization  applies  only  in  such  cases. 
If  a  special  tax  is  permanently  imposed  on  a  class  of  property, 
it  can  be  capitalized  because  of  the  existence  of  a  taxless  field 
to  which  the  taxpayer  can  repair  and  in  which  he  can  invest 
his  money.  If  a  special  class  of  property  is  exempt  from 
taxation,  the  influence  will  bfc  felt  only  because  the  exemption 
applies  to  it  alone,  and  not  to  other  classes  of  property.  But 
if  the  tax  applies  to  all  classes  of  property  alike,  there  can 
be  no  amortization ;  and  if  the  exemption  applies  to  all  classes 
alike,  there  can  be  no  capitalization.  The  very  basis  of  the 
theory  is  the  exclusiveness  or  uniqueness  of  the  proceeding. 
When  a  tax  is  a  general  tax  and  not  an  exclusive  tax,  the 
theory  ceases  to  apply. 

Now  the  income  tax  contemplated  by  the  amendment  is  not 
a  special  tax  but  a  general  tax.  By  the  very  terms  of  the 
amendment  it  applies  to  all  kinds  of  income,  from  whatever 
source  derived.  This  is  the  true  purpose  of  the  measure.  It 
is  conceded  that  if  a  special  tax  were  imposed  co  nomitic  on 
state  and  municipal  bonds,  it  would,  theoretically  at  lea.st,  have 
some  influence  on  their  market  value,  although,  as  we  have 
seen,  the  practical  effect  of  such  a  tax  would  be  less  than  might 
be  expected.  But  if  incomes  derived  from  state  bonds  are 
taxed  at  the  same  rate  as  incomes  from  other  bonds,  how  can 
the  tax  have  any  influence  on  their  value .'  There  is  no  taxless 
field  to  which  the  bondholder  can  repair  if  he  seeks  to  make  a 
different  investment  In  whatever  kind  of  property  he  puts 
his  capital,  his  income  will  be  equally  diminished  by  the  tax. 
But  if  all  incomes  are  equally  diminished,  there  can  be  no 
change  brought  about  in  the  relative  superiority  or  inferiority 
of  the  different  sources  of  income.  If  five  percent  government 
bonds  are  selling  at  par,  and  if  a  general  income  tax  of  one 
per  cent  is  imposed  on  all  incomes,  the  price  of  government 
bonds  as  compared  with  other  securities  in  general  will  not  be 
affected  one  iota.     We  may  go  farther,  and  say  that  there  will 


;  r 


'^is^KMit^Vf. 


6l2 


The  Income  Tax 


w 


m^ 


be  no  change  at  all  in  the  actual  values  of  any  securities, 
unless  the  tux  is  so  high  as  to  cause  a  perceptible  exo-'us  of 
capital  to  foreign  countries,  with  a  resulting  slight  change 
in  the  domestic  rate  of  interest,  which  change  in  the  rate  of 
interest  would,  of  course,  reflect  itself  in  the  market  values 
of  the  securities. 

The  ordinary  view  is  tc  he  traced  to  the  adoption  by  the 
supreme  court  of  what  it  mistakenly  conceived  to  be  the  opin- 
ion of  Chief  Justice  Marshall.  In  explaining  the  decision  of 
the  court  in  Weston  ?'J. Charleston, Chief  Justice  Marshall  said : 
"  The  right  to  tax  the  contract  to  any  extent,  when  made,  must 
operate  upon  the  power  to  borrow  before  it  is  exercised  and 
have  a  sensible  influence  on  the  contract."  And  again :  "To 
any  extent,  however  inconsiderable,  it  is  a  burthen  on  the  oper- 
ations of  government."  This  reasoning,  in  these  very  terms, 
was  ajiplied  in  the  Pollock  case  to  the  federal  income  tax.  It 
is  evident,  however,  that  this  application  is  erroneous  ;  for  if 
the  tax  is  a  p.irt  of  n  general  income  tax,  there  can  be  no  capi- 
talization and  no  change  in  the  value  of  the  bonds ;  and  hence 
it  cannot  "operate  on  the  power  to  borrow"  and  cannot  be  a 
"burthen  on  the  operations  of  government."  Marshall's  state- 
ment was  justified,  in  the  case  which  he  had  before  him,  for 
two  reasons :  first,  because  the  tax  in  question  was,  in  part  at 
least,  CO  nomine  on  government  bonds ;  and  secondly,  because  it 
was  a  state  tax  on  federal  securities.  In  the  Pollock  case,  how- 
ever, not  only  was  the  court  discussin'^j  a  federal  tax  on  state 
bonds,  but  the  tax  in  question  was  a  general  tax.  Passing  over, 
for  the  moment,  the  distinction  between  a  state  tax  on  federal 
securities  and  a  federal  tax  on  state  securities,  which  will  be 
treated  below,  the  difff  rence  between  a  special  tax  and  a  gen- 
eral tax  is  in  itself  sufficient  to  show  that  Marshall's  reasoning 
does  not  apply  to  the  Pollock  case.  In  this  later  case,  the 
failure  of  the  court  to  estimate  the  inexorable  operation  of 
economic  law  led  it  astray;  and  implicit  reliance  on  the 
wOnomic  views  of  our  later  jurists  has  misled  so  eminent  a 
statesman  as  Governor  Hughes. 

We  may  accord  the  fullest  authority  to  the  legal  reasoning  of 


Tlu  Proposed  Sixteenth  Atmndmcnt         613 

the  supreme  court ;  but  when  a  legal  conclusion  is  based  on  an 
economic  argument  which  is  plainly  fallacious,  it  is  time  to  call 
a  halt.  In  this  instance  the  economic  reasoning  of  the  supreme 
court  is  so  obviously  defective  that  it  invalidates  the  entire  con- 
clusion. A  specific  and  exclusive  tax  on  state  bonds  would 
indeed  have  the  consequences  ascribed  to  it  by  the  court ;  a 
general  t.ix  could  not  possibly  have  those  consequences.  A  tax 
on  the  income  of  state  or  municipal  bonds  as  a  part  of  a  gen- 
eral income  tax  would  leave  everything  as  it  was  before  the 
tax.  If  the  operations  of  state  governments  were  previously 
not  burthened,  they  would  not  be  burthened  by  such  a  tax. 
If  the  power  of  the  state  to  contract  was  not  affected  before 
the  imposition  of  the  tax,  it  would  not  be  affected  by  the  im- 
position of  the  tax.  The  economic  situation  would  be  un- 
changed. 

It  may  be  claimed,  however,  that,  even  if  the  preceding  argu- 
ment is  valid,  and  even  though  state  and  municipal  bondi<  wiil 
not  suffer  in  price  by  being  subjected  to  a  general  income  tax,  a 
special  exerription  of  state  and  municipal  bonds  from  taxation 
will  enhance  their  price.  Therefore  a  failure  to  e.xempt  them 
might  be  regarded  as  virtually  tantamount  to  an  attack  on  the 
state's  credit.     This  claim  is  specious,  but  it  is  not  valid. 

In  the  first  place,  the  actual  enhancement  of  prices  due  to 
special  exemption  will  be  far  less  than  is  usually  imagined ;  fc-r 
not  only  will  an  income  tax  or  an  exemption  from  such  a  tax 
have,  as  pointed  out  above,  no  significant  influence  on  th-.-  cap- 
ital value  of  the  security,  but  the  mere  fact  of  the  general 
e.xem.ption  of  all  state  and  municipal  bonds  wuuld,  in  itself,  tend 
to  mimimize  even  this  slight  influence.  The  exemption  of  the 
bonds  of  a  particular  municipality  mi^ht  well  be  expected  t  ■ 
exert  an  influence  on  their  price.  But  in  proi>ortion  as  other 
municipal  bonds  in  the  state,  and  state  and  local  securities  in 
other  states,  come  to  enjoy  the  same  privilege,  the  aovanta^c 
would  tend  to  be  neutralized.  If  the  exemption  were  to  app.y 
to  all  state  and  local  bonds,  amounting  to  many  hundreds,  or 
perhaps  in   the  near  future  even  thousands,  ol    miliioas    of 


I 


6i4 


The  Income  Tax 


■  I 


m 


dollars,  we  Lhouid  sec  the  same  development  which,  as  ex- 
plained  above,  has  actually  worn  away  the  original  advantapr 
attaching  to  the  tax  exempt  bonds  of  New  York  City.  The 
broader  the  exemption  area,  the  less  the  value  of  the  exemp- 
tion. 

The  argument  that  tax  exemption  is  especially  needed  in 
times  of  crisis  is  thus  robbed  of  most  of  its  force  ;  for  if  tax 
exemption  has  little  value  under  normal  conditions,  it  can  have 
no  great  value  in  times  of  crisis.  At  such  times,  indeed,  it  will 
have  no  value ;  for  in  crises  bonds  are  almost  completely  un- 
salable. The  drop  in  their  price  is  so  great  that  the  question 
of  their  taxation  or  exemption  becomes  immaterial. 

It  may  be  urged,  further,  that  even  if  the  exemption  of 
state  securities  from  a  federal  income  tax  were  of  real  advan- 
tage to  the  states,  there  seems  to  be  no  reason  why  the  federal 
government  should  confer  upon  them  this  advantage.     The 
constitutional  inhibition,  if  it  means  anything,  means  only  that 
the  national   government  shall  not  discriminate  against  the 
states  by  injuring  their  power  to  borrow.     It  does  not  mean 
that  the  national  government  should  discriminate  in  favor  of 
the  states  by  enhancing  their  power  to  borrow.     A  special 
exemption  of  state  bonds  from  a  general  income  tax  would,  if 
it  increased  the  market  price  of  these  securities,  be  tantamount 
to  a  gift  from  the  national  government  to  the  state  government. 
Such  a  relation,  however,  is  not  contemplated   by  the  con- 
stitution.    It   is   not    the   function   or   the   province  of  the 
national  government  to  confer  gifts  or  favors  upon  the  state 
governments.     The  states  can  look  after  themselves,  and  all 
that  they  have  a  right  to  ask  from  the  national  government 
is  that  there,  shall  be  no  unconstitutional  interference  with 
their  powers.     Equality  under  the  constitution  they  have  a 
right  to  claim  ;  special  favors  they  have  no  right  to  demand. 
Moreover,  such  an  exemption  of  state  and  municipal  bonds 
would  be  inconvenient  to  the  national  government  and  unjust 
to  the  individual  citizen.     Federal  securities  have  at  times 
been   taxed  by  the  federal  government.     It  mav   again   be- 
come desirable  that  they  shall  be  so  taxed  ;  all  the  important 


■P 


Tip-  Proposed  Sixteenth  Amendment         615 


European  countries  now  find  it,  on  the  whole,  advisahk-  to 
tax  their  own  securities.  If  the  bonds  of  the  United  States 
were  taxed  under  a  general  income-tax  law,  and  if  at  the 
same  time  state  and  municipal  bonds  were  exenipt,  it  will  be 
readily  seen  that  this  would  in  effect  Ix-  subordinating  the  credit 
of  the  United  States  to  that  of  the  local  division's.  Such  a 
contingenc  can  be  contemplated  only  with  apprehension.  (;f 
still  greater  importance  is  the  consideration  that,  it  state  and 
local  bonds  were  especially  exempt  as  over  aj^aiiist  the  whole 
mass  of  private  and  corporate  securities,  the  individual  citi/en 
would  have  a  just  cause  for  complaint.  Not  only  would  it 
mean  an  escape  from  taxation  for  all  those  who  chose  to 
invest  in  state  or  local  bonds;  but,  if  the  advantage  were  at  ail 
appreciable,  the  increasing  demand  f  r  these  state  and  local 
bonds  would  mean  such  a  transfer  of  investments  as  to  cause 
a  sensible  depreci.iticm  in  the  market  value  of  other  securities, 
and  the  unfortunate  possessors  of  tho.->e  other  securities  would 
have  to  suffer  a  loss,  the  corresponding  gain  arcruing  to  the 
happy  possessors  of  the  tax-exempt  state  and  1     al  b'nds 

Thus,  from  every  point  of  view,  the  special  ■xemption  of 
state  bonds  from  a  general  income  ta.\  is  indefensible.  It 
would  in  all  likelihood  not  accomplish  the  "bject  which  it  is 
designed  to  attain  ;  but  in  so  far  as  it  did  at  ompli'-h  this  ob 
ject,  it  would  create  a  glaring  inequality,  inimical  alike  to  the 
maintenance  of  the  i.ational  credit  and  to  the  interests  of  the 
mass  of  the  individual  taxpayers. 


§  4.    The  Immunity  of  State  and  Mumcipal  Bvndi  /rom 

1  axativn. 

We  come  now  to  the  final  consideration.  Even  if  it  were 
true,  as  it  is  not,  that  the  propo--  1  constitut:  nal  iimendnient 
empowers  the  i,  itiona!  government  t''  tax  tr  :ncome  "f  state 
bonds,  there  are  valid  r.-asons  to  justiiy  «u..'.  a  t-.ange  in  the 
law.  Even  if  the  amendment  may  be  -j  inteq  ret'r'i  as  to 
ffive  the  federal  "■overnment  this  new'  powi.  •  it  o!;j;ht  stir  to 
prevail 


s 

1* 

I 


6i6 


Tht  Income  Tax 


H 


On  what  ground,  however,  it  may  be  asked,  can  we  defend 
the  immunity  of  national  bonds  from  state  taxation,  and  at  the 
same  time  upliold  the  possible  legitimacy  of  the  federal  taxa- 
tion of  state  bonds  ?  Does  not  the  same  principle,  the  inde- 
pendence of  each  government  within  its  own  sphere,  apply  in 
both  cases  ?     Let  us  look  into  this  question. 

If  wc  examine  the  successive  legal  decisions  on  the  sub- 
ject, we  shall  find  that  there  have  been  three  stages  in  the  de- 
velopment of  the  doctrine  that  the  states  may  not  tax  the 
agencies  of  federal  ^Mvernment.  In  the  case  tf  McCulloch 
vs.  Maryland,  in  1819,  the  objection  was  to  a  special  and  ex- 
clusive state  tax  on  an  agency  of  the  federal  govrnment; 
for  the  tax  in  question  was  levied  on  "  all  banks,  or  branches 
thereof,  in  the  state  of  Maryland,  not  chartered  by  the 
legislature,"  and  the  only  bank  at  that  time  fitting  the 
description  was  the  Bank  of  the  United  States.  In  the 
case  of  Weston  7'J.  Charleston,  in  1829,  the  second  step  was 
taken  by  declaring  unconstitutional  a  state  or  local  tax  .vhich 
was  indeed  not  exclusively  levied  on  the  instrumentalities  of 
the  national  government,  but  which  specifically  and  by  name 
included  federal  bonds  in  a  list  of  taxable  securities.  The 
third  and  final  stage  was  reached  in  the  case  of  Dobbins  vs. 
Commissioners  of  Erie  County,  decided  in  1842,  in  which  it 
was  held  that  a  local  tax,  entirely  general  in  character  and 
making  no  special  mention  of  government  salaries,  was  nev- 
ertheless invalid  so  far  as  it  affected  the  salaries  of  fed- 
eral officers.  And  in  the  same  way,  a  few  decades  later,  in 
1862,  it  was  decided  in  Bank  of  Commerce  vs.  New  York 
City  that  a  state  tax  on  federal  bonds  was  unconstitutional 
even  if  the  tax  were  entirely  general  in  character  and  did  not 
mention  federal  bonds  at  all.  Thus  we  have  a  gradual 
evolution  of  the  doctrine,  from  the  initial  stage  of  exclusive 
taxation  through  that  of  specific  mention  to  the  final  stage  of 
general  taxation. 

On  the  other  hand,  in  the  reverse  case  of  the  attempt  of  the 
federal  jrovernment  to  trix  state  agencies,  there  was  no  such 
gradual  evolution   of  the  doctrine.     The  theory  which  had 


LB&ri 


I 


The  Proposed  Sixteenth  Amiudmiiit         617 


reached  its  complete  formulation  in  1842  imuI  in  i.Sf)_',  with 
reference  to  state  taxation  of  federal  agencies,  was  now,  in 
1870,  taken  over  bodily  to  apply  to  the  federal  taxation  of 
state  agencies.  In  the  case  of  Collector  vs.  Day  it  was  de- 
cided that  a  general  federal  income  tax  was  unconstitutional 
so  far  as  the  salaries  of  slate  judicial  officers  were  concerned, 
even  though  they  were  not  at  all  specifically  mentioned  in 
the  law.     And  in  t^         'lock  case  this  reasoning;  was  ;ipplicd 

,omc  ♦ax  so  far  as  it  reached  the 

t  I  \  J  .  fy  the  rule  of  non-inter- 
^  '  .,  .V:'.  T  the  first  set  of  cases 
iV  -n  iis  .  lication  to  the  second 
I  <  i  .eded  that  a  tax  on  the 
,!  \v  1:  '  really  impairs  the  opcra- 
'■  I.  i;  just  as  obnoxious  to  the 
>■  I  ■  -1  federal  agencies.  It  may 
'".  ial  t  .deral  tax  on  state  bonds  or 
!■  .waid  be  just  as  indefensible  a? 
a  similar  state  tax  on  federal  bonds.  The  question  at  issue, 
however,  is  a  different  one  —  it  is  whether  the  taxation  of 
federal  bonds  under  a  general  state  tax  law  is  to  be  put  in 
the  same  categcy  as  the  taxation  of  state  bonds  under  a 
general  federal  tax  law.  In  our  opinion  the  two  cases  are 
not  on  a  par,  and  for  the  two  following  reasons,  the  one  po- 
litical, the  other  cconr"iic. 

'I  he  polilic^d  ground  on  which  a  distinction  may  be  drawn 
between  the  .wo  cases  is  this:  a  st:Ue  legislature  may  fre- 
quently find  it  in  the  interest  of  the  state  to  follow  a  policy 
which  is  different  fiom  that  of  othei  taus,  r.nd  which 
may  even  be  dicdnctly  opposed  to  that  .  owed  in  federal 
legislation.  The  states,  actincc  throu?!-  their  legislatures,  may 
regard  only  thoir  peciiliar  narrow  interests,  and  may  con- 
sider them  superior  to  those  of  the  country  as  a  whole. 
On  the  other  hand.  Congress  is  composed  of  representa- 
tives from  all  the  ?tatc",  and  in  thf-  S:'n:itc-.  in  particular. 
equal  voice  is  given  to  the  wishes  of  each  sfte.     There  is 


to  a   general    ft-            :..^u 

income  of  mun-  i'  il  -i"ti  ' 

On  what  gr-  .     if   •  .>m    , 

ferencc  with              •    >  f  g< 

and  withh     1       -              •.■! 

set  of  case    '     .■  ,    4 

agencies         ,'.1     _  '\   :.  .1.' 

tions  of  state  v     t  ,  - 

constitution  as  a  ^ini  i'  >i  . 

further  be  concede  1        .  . 

on  the  income  of  sta 

fvf 


!l 


I 


iMi 


6i8 


The  Income  Tax 


hence  no  likelihood  of  a  federal  tax  law  interfering  with  the 
states,  except  where  it  is  the  well-considered  opinion  of  a 
majority  of  all  the  states  that  the  interest.-  of  any  particular 
state  ought  to  be  subordinated  to  the  welfare  of  the  whole. 
In  other  words,  while  the  federal  government  would,  without 
the  restrictions  which  the  supreme  court  has  read  into  the 
constitution,  have  no  protection  against  hostile  action  on  the 
part  of  state  legislatures,  the  state  governments  have,  from 
the  very  nature  of  the  case,  a  far  greater  measure  of  protec- 
tion against  the  acts  of  Congress. 

It  must,  moreover,  not  be  overlooked  that  all  sound  consti- 
tutional interpretation  should  keep  pace  with  the  changing 
needs  of  political  and  social  life.  The  conditions  which 
existed  when  the  constitution  was  framed  are  no  longer  ex- 
istent. At  that  time  the  political  and  economic  interests  of 
the  separate  states  were  so  distinct  and  the  sense  of  state 
sovereignty  was  so  strong  that  it  was  only  with  extreme 
difficulty  that  a  federal  government  was  established  at  all. 
During  the  last  century,  however,  the  development  of  the 
underlying  economic  and  social  forces  has  created  a  nation, 
and  this  development  calls  for  uniform  national  regulation 
of  many  matters  which  were  not  dreamed  of  by  the  founders. 
In  all  the  federal  states  which  have  been  created  during  the 
nineteenth  century,  under  the  influence  of  these  newer  eco- 
nomic forces,  in  Canada,  in  Germany,  in  Australia  and  in 
South  Africa,  we  find  no  .such  problems  as  those  which  vex 
us,  because  of  the  greater  authority  initially  granted  to  the 
central  government.  In  Canada,  for  instance,  we  find  ju.st 
the  reverse  of  our  system.  With  us  all  powers  not  expressly 
conferred  upon  the  federal  government  are  reserved  to  the 
states  or  to  the  people  ;  in  Canada  the  powc-s  not  expressly 
conferred  on  the  states  or  provuiccs  ire  reserved  to  the 
federal  government.  It  is  idle  to  say  that  this  centraliza- 
tion of  powers,  where  centralization  is  needed,  is  injurious 
either  to  democracy  or  to  self-government.  There  is  at 
least  as  much  true  democracy  and  as  nnich  real  self-gov- 
ernment in  Canada  and  in  Australia  as  there  is  in  the  United 


wmm 


Tlu  Proposed  Sixteenth  Amendment        619 

Stit'js.  Let  us  not  make  a  fetich  of  "self-government,"  and 
let  us  not  oppose  central  authority  in  those  cases  where  self- 
government  means  retrogression  rather  than  progress. 

The  supreme  court  of  the  United  States  has  already  been 
influenced  by  these  considerations.  In  the  case  of  Veazie 
Bank  vs.  Fenno  *  it  was  held  that  a  federal  tax  on  state  bank- 
notes was  valid,  because  of  the  necessity  of  upholding  a  na- 
tional system  of  currency.  In  the  recent  and  very  important 
case  of  South  Carolina  vs.  United  States'  it  was  held  that  a 
federal  tax  on  a  state  dispensary  was  constitutional.  On  the 
other  hand,  it  is  certain  that  the  supreme  court  would  never 
uphold  the  validity,  without  the  express  consent  of  Congress, 
either  of  a  state  tax  on  national  bank-notes  or  of  a  state  tax 
on  a  federal  business  or  a  federal  monopoly.  In  other  words, 
we  are  gradually  working  out,  in  detail,  the  distinction  that 
Marshall  formulated  many  years  ago  in  McCuUoch  vs.  Mary- 
land: "The  difference  is  that  which  always  exists  and  al- 
ways must  exist  between  the  action  of  the  whole  on  a  part 
and  the  action  of  a  part  on  the  whole."  Sooner  or  later  it 
will  be  realized  that  this  distinction  applies  also  as  between  a 
state  tax  on  federal  bonds  and  a  federal  tax  on  state  bonds. 
Sooner  or  later  we  shall  outgrow  many  of  the  notions  of  ex- 
treme individualism  and  of  exaggerated  state  rights  which 
dominated  the  country  at  the  time  of  the  formation  of  the 
constitution.  They  are  bound  to  disappear  in  the  United 
Statos  as  they  have  disappeared  in  every  other  great  federal 
republic. 

If  this  political  argument  Iocs  not  appeal  to  those  who  are 
still  enmeshed  in  the  web  of  extreme  individualism  and  exag- 
gerated state  rights,  there  lemains  another  argument  of  an 
economic  character  which  is  of  decisive  importance.  Even 
though  we  assume  that  from  the  politic;-',  point  of  view  no 
distinction  ought  to  be  made  in  the  matter  of  taxation  be- 
tween the  state  and  the  national  government,  it  is  susceptible 
of  proof  that  valid  economic  reasons  will  jusiify  the  distinction 
between  a  general  state  tax  on  federal  bonds  and  a  general 
'  8  \V,iUacc,  53 J  (1S70).  ••'199  U.S.,  4J7  (ii>>5). 


A 


620 


The  Income  Tax 


It? 

■ » 

I 


federal  tax  on  state  bonds.  The  general  state  tax  to  which  allu- 
sion is  made  is  the  general  property  tax.  The  general  federal 
tax  to  which  allusion  is  made  is  the  general  income  tax.  Now 
a  state  tax  on  government  bonds,  as  part  of  a  general  property 
tax,  not  only  is  unconstitutional  but  ought  always  to  remain 
unconstitutional.  State  A,  which  imposes  the  tax  in  question, 
would,  of  course,  from  the  very  nature  of  the  case,  tax  all  other 
moneyed  capital  as  well  as  the  capital  invested  in  federal  bonds. 
But  its  neighbor,  state  B,  might  see  fit  not  to  impose  a  general 
property  tax.  There  are  several  states  in  the  Union  which 
to-day  do  not  impose  a  general  property  tax.  Or,  even  if 
state  B  imposed  a  general  property  tax,  its  methods  of  as- 
sessment might  be  so  lax  that  it  would  not  reach  all  other 
moneyed  capital.  Consequently,  if  state  A  included  govern- 
ment bonds  in  its  taxable  general  property  and  actually  as- 
sessed the  bonds,  the  bonds  would  undoubtedly  be  affected 
in  value  throiit^h  the  lack  of  uniformity  in  the  various  states. 
The  power  of  the  general  government  to  borrow  money  might 
thus  be  seriously  impaired,  and  this  risk  would,  beyond  cavil, 
constitute  a  sufficient  reason  for  withholding  the  power  from 
the  states.  On  the  other  hand,  if  the  federal  government 
were  to  impose  a  general  income  tax  which,  under  the  very 
terms  of  the  constitution  must,  as  we  shall  see,  necessarily  be 
uniform  throughout  the  country,  the  income  from  state  bonds 
would  be  reached  in  precisely  the  same  way  as  the  income 
from  all  other  moneyed  cai)ital ;  and,  as  we  have  abundantly 
shown  above,  there  would  ho  no  alteration  in  the  value  of  the 
bonds,  and  therefore  no  influence  exerted  on  the  power  of  the 
states  to  borrow. 

The  supreme  court  of  the  United  States  went  off  on  a 
wrong  tack,  not  in  the  case  of  Dol)bins  vs.  Commissioners  in 
1 842,  but  in  the  case  of  Collector  vs.  Day  in  1870.  The  cases, 
from  the  economic  poinl  of  view,  were  not  on  a  purity.  Had 
Collector  t'.v.  Day  presented  a  situation  like  that  in  McCulloch 
vs.  Maryland,  i.e.,  had  it  been  a  question  of  an  exclusive  fed- 
eral tax  comparable  to  the  exclusive  state  tax,  the  economic 
basis  of  the  argument  would  have  been  the  same.     But  when 


The  Proposed  Sixleenth  Amendment        621 

Collector  iV.  Day  attempted  to  apply  by  inversion  Dobbins  t'j. 
Commissioners,  —  when,  in  other  words,  a  general  federal  tax 
was  declared  equivalent  to  a  general  state  tax,  —  the  judges 
were  misled  by  a  superficial  analogy  which  had  no  basis  in 
economic  fact.  In  the  same  way  the  supreme  court  eri'cd 
when,  in  deciding  the  first  Pollock  case,  it  thought  that  it  was 
applying  the  principle  involved  in  Weston  vs.  Charleston. 
Weston  vs.  Charleston  dealt  with  a  state  tax  on  federal  securi- 
ties ;  the  Pollock  case  involved  the  question  of  a  federal  tax 
on  state  securities.  As  wc  have  seen,  the  economic  conclu- 
sions which  apply  in  the  one  case  do  not  apply  in  the  other. 

In  the  long  run,  however,  the  economic  interests  of  a  com- 
munity must  prevail ;  for  law  is  nothing  but  the  crystallization 
of  economic  and  social  imperatives.  Sooner  or  later,  there- 
fore, the  underlying  fallacy  in  the  more  recent  decisions  of 
the  supreme  court  will  be  recognized  by  the  court  itself,  or 
the  mistake  will  be  corrected  by  constitutional  amendment. 
The  law  cannot  permanently  lag  behind  the  economic  truth. 

Entirely  apart,  therefore,  from  any  legal  or  political  consid- 
erations that  might  be  invoked,  an  economic  analysis  shows 
clearly  that  the  inclusion  of  state  bonds  under  a  j^enoral  fed- 
eral tax  is  a  very  different  thing  from  the  inclusion  of  federal 
bonds  under  a  general  state  tax.  Since  the  economic  results 
arc  or  may  be  so  entirely  different,  the  legitimacy  of  the 
action  of  the  respective  governments  is  entirely  different. 
From  the  economic  point  of  view  the  states  ought  not  to  have 
the  right  to  tax  the  bonds  of  the  federal  government  at  all ; 
but  the  federal  government  might  well  be  justified  in  includ- 
ing r.tatc  bonds  iti  a  general  income  tax.  Hence,  even  if  the 
constituti(ma!  amendment  were  to  have  the  legal  consciuences 
which  are  predicated  of  it,  it  ought  still  to  prevail,  in  order  to 
subser\'e  the  best  economic  interests  of  the  whole  country. 


H 


§  5'     '^''"■'  Question  of  I'niformity 

There  remains  one  other  point  which  deserves  a  word  of 
comment.      This   refers  to  the  question  of  uniformity.      It 


622 


Tlu  Income  Tax 


might  be  claimed,  and  in  fact  it  has  been  claimed,  that  under 
the  proposed  amendment  there  will  be  no  assurance  of  uni- 
formity, for  the  constitutional  provision  as  to  uniformity  spc 
cifically  applies  only  to  "all  duties,  imposts  and  excises." 
Since  the  amendment,  while  changinj^  the  method  of  levying 
the  income  tax,  in  so  far  as  it  has  been  held  to  be  a  direct 
tax,  leaves  unaltered  its  nature  or  appellation  as  a  direct  tax, 
it  might  be  contended  that  the  income  tax  as  a  direct  tax  is 
not  necessarily  subject  to  the  constitutional  inhibition  as  to 
uniformity. 

This  contention,  however,  is  clearly  erroneous.  The  con- 
stitution gives  a  double  classification  of  ta.\es  —  one  according 
to  their  nature,  the  other  according  to  the  mode  of  levy. 
According  to  their  nature,  taxes  are  divided  into  the  four 
classes  of  direct  taxes,  duties,  imposts  and  exci.ses.  Accord- 
ing to  the  mode  of  levy,  however,  taxes  are  divided  into  two 
classes  only — those  subject  to  the  rule  of  apportionment  and 
those  subject  to  the  rule  of  uniformity.  If,  now,  the  income 
tax  is  by  constitutional  amendment  taken  out  of  the  first  cate- 
gory, it  necessarily  falls  into  the  .second.  There  is  no  third 
category  into  which  it  could  fall.  To  assume  that  an  income 
tax  could  be  levied  without  uniformity  would  be  to  make 
of  the  tax  neither  fish  nor  Hesh  —  to  keep  it,  as  it  were, 
suspended  in  mid-air  between  the  two  solid  po.sts  of  appor- 
tionment and  uniformity.  These  are  the  only  methods  con- 
templated by  the  constitution.  Every  tax,  no  matter  what  its 
application,  must  t)e  levied  in  one  of  these  two  ways.  If  the 
one  way  is  barred  by  the  constitutional  amendment,  it  must 
necessarily  be  levied  in  the  other  way.  To  assume  that  under 
the  amendment  we  could  have  anything  but  a  uniform  income 
tax  would  be  to  do  violence  to  every  rule  of  constitutional 
construction. 

Chief  Justice  Fuller,  in  the  first  Pollock  case,  makes  this 
clear.  He  says:  "Although  there  have  been  from  time  to 
time  intimations  that  there  might  be  some  tax  which  was 
not  a  direct  tax  when  included  under  the  wt)rds  'duties,  im- 
positions and  excises,"  such  a  tax  for  more  than  a  hundred 


i 


The  Proposed  SixUentk  Amendment        623 

years  of  national  existence  has  as  y^it  r-'^mairu-d  undisc  overed, 
notwithstanding  the  stress  of  particular  circumstances  has  in- 
vited thorough  investigation  into  source-  'A  re-,  iiu;  "  '  Is  it 
reasonable  to  suppose  that  the  court  wouW  ?*y  ir  di.  face  of 
the  experience  of  a  century  in  order  to  cre^t-^  -jur  an  abor- 
tion ?  Moreover,  any  such  interpretation  of  the  ;in,.;ndment 
would  lead  to  a  manifest  absurdity.  For  under  '-t-  •.  'ing 
decisions  an  income  tax  levied  on  business  or  on  ;>r  .t'ess  -  il 
incomes  is  still  to  be  classed  as  an  excise  or  duty,  a'^.  tiw----  - 
fore  subject  to  the  uniformity  clause.  How,  then,  >  fmi'^  ** 
have  a  general  income  tax  a  part  of  which  should  be  unif'^'m 
and  a  part  of  which  should  not  be  uniform  .'  Such  a  tax  w^jvv/- 
indeed  be  theoretically  possible,  but  is  it  conceivable  trat  an 
legislature  composed  of  sane  human  beings  would  attempt 
to  enact  such  a  measure .'  Moreover,  apart  from  any  sut-h 
considerations,  it  is  scarcely  open  to  doubt  that  the  otiity 
clauses,  such  as  the  fifth  amendment,  as  well  as  the  implied 
restrictions  of  the  constitution,  would  avail  to  prevent  anv 
serious  derogation  from  the  principles  of  equality  in  taxation.* 

The  six  New  York  lawyers,  in  their  Memorandum,  seem  to 
doubt  this.  "  It  should  be  realized,"  say  they,  "  that  under  the 
proposed  Sixteenth  Amendment  congress,  in  exercising  the 
power  to  lay  and  collect  income  taxes,  would  not  be  restrained 
by  any  constitutional  rule ;  that  is  to  say,  tnat  no  rule  of 
apportionment  nor  any  other  rule  of  restriction  is  made  appli- 
cable and  that  it  could  act  oppressively."''  The  chief  exam- 
ple of  such  possible  oppression  is,  in  their  opinion,  the  danger 
of  graduated  taxation.* 

As  to  this  danger,  however,  three  considerations*  must  be 
borne  in  mind.  In  the  first  place,  all  th  •  imaginary  perils 
referred  to  are  already  incurred  by  the  I'luted  .States,  for  in 

'  '57  U-«-.  P-  557- 

-This  whole  subject  is  well  treated  by  James  M.  Gray,  I.tinUa'i.n  of  tiit 
Taxing  Power,  iiiiluiiint;  I imilalions  upon  PiiHir  /nJfl'l,iiii,'i.  I  ,''',-tttist 
upon  tilt  Constituliomil  I  aw  go:,rning  J'liJiulion,  tU,  .San  Krancisi-o,  I90<). 
See  esp.  chap,  i,  and  chap.  S,  p.  357. 

'  Op.  at.  {supr,!,  p.  558),  p.  14. 

*  Op.  ill.,  pp.  lS-21. 


B  i  I 


I'  i 


!  N 


624 


The  Income  Tax 


the  inheritance  tax  cases  >  the  supreme  court  disagreed  with 
these  identical  arguments  presented  by  some  of  the  very 
same  counsel,  and  upheld  the  principle  of  progressive  taxa- 
tion. If  the  country  is  in  danger  from  that  principle,  the 
danger  will  not  be  enhanced  by  the  authorization  of  an  income 
tax ;  for  if  there  were  really  any  desire  on  the  part  of  the  Con- 
gress to  confiscate  property,  it  could  be  far  more  readily  done 
by  a  system  of  graduated  inheritance  taxes  than  by  a  system 
of  graduated  income  taxes. 

In  the  second  place,  the  counsel  make  an  unfortunate  inva- 
sion into  the  field  of  economics,  and  present  what  they  con- 
sider an  irresistible  array  of  opinion  opposed  to  the  principles 
of  progressive  taxation.     This  same  array  of  authorities  was 
presented  unavailingly  to  the  supreme  court  both   in  the 
income-tax  case  and  in  the  inheritance  tax  cases.     Had  the 
counsel  been  as  eminent  in  economic  lore  as  in  legal  learning, 
they  would  have  realized  that  the  overwhelming  opinion  of 
modern  economists  is  in  favor  of  the  very  principle  which 
they  deprecate,'  however  much  all  may  be  agreed  as  to  the 
undesirability  of  any  extreme  application  of  the  principle. 
To  deprecate  the  abuse,  however,  is  not  to  oppose  the  use  of 
a  principle.*    The  chief  reliance  of  the  six  lawyers,  more- 
over, is  upon  Mr.  Lecky,  who,  as  is  well  stated  by  the  oppos- 
ing counsel  in  the  first  inheritance  tax  case,  "is  known  as  a 
historian  and  not  as  an  economist,  and  who  wrote  the  work 
cited  very  much  in  the  character  of  a  partisan  apologist  for 
reactionary  Toryism  in  Great  Britain."* 

In  the  third  place,  it  must  not  be  forgotten  that  in  the  very 

I  Magoun  w.  Illinois  Trust  and  Savings  Bank,  170  U.S..  283;  an.l  Knowlton 
vs.  Moore,  178  L'.S.,  41. 

•i  In  the  hock  l.y  tlie  present  writer  on  Vrof^renirf  Taxntioti  in  Theory  and 
Pniitui,  2.1  e.l..  New  V'urK,  K^S,  the  <listinguishcil  counsel  couK!  have  found 
a  hundred  authorities  in  favor  of  progreuiw  taxation  for  every  one  that  they 
quote  in  oppnsition. 

»  ( 7".  5H/r7.  p .  34.  ,       r^    -      .     .    ■ 

<  //;  ;■•■  lirake  r -.  K.k hersberyer,  Hnt/  ,ind  Argument  for  Dttendnnt  tn 
Erroi  .111.1  AftclU,-.  By  I".  A.  Moran.  Ruherl  S.  Uev  K.lwanl  C  Akin  and 
Frank  1..  Shepard      Chicago,  n.  d.  [189S],  p.  Oo. 


The  Proposed  Sixteenth  Amendment       625 

cases  in  which  the  legitimacy  of  the  general  principle  ot 
graduation  is  upheld,  the  supreme  court  of  the  United  States 
pointed  out  the  existence  of  implied  restrictions  on  the  power 
of  government  to  introduce  any  glaring  inequality  in  taxation. 
In  the  first  inheritance  tax  case,  where  the  constitutionality  of 
a  graduated  inheritance  tax  imposed  by  a  state  was  upheld, 
the  court  declared  the  principle  of  graduation  not  to  be  re- 
pugnant to  the  fourteenth  amendment,  which  requires  the 
states  to  observe  due  process  of  law  and  to  follow  the  principle 
of  equality.  But  the  court  was  careful  to  point  out  that  the 
rule,  even  with  this  interpretation,  "is  not  without  limitations 
under  the  equality  clause  of  the  fourteenth  amendment,"  '  and 
proceeded  to  quote  from  another  recent  tax  case  that  "clear 
and  hostile  discriminations  against  particular  persons  and 
classes,  especially  such  as  are  of  unusual  character,  unknown 
to  the  practice  of  government,  might  be  obnoxious  to  the 
constitutional  prohibition."* 

The  same  principle  which  was  stated  to  be  operative  on  the 
state  governments  was  declared,  in  the  second  inheritance 
tax  case,  to  be  applicable  as  restrictive  of  the  power  of  the 
federal  government.  The  court  decided  that  the  meaning  of 
the  federal  law  of  1898  was  that  the  progressive  rate  applied 
only  to  the  separate  shares,  and  not  to  the  entire  legacy,  i.e., 
that  two  recipients  of  a  legacy  of  $20,000,  for  instance,  should 
be  taxed  at  the  same  rate,  irrespective  of  whether  the  legacy 
was  in  the  one  case  a  part  of  a  hundred  thousand  dollar  estate, 
or  in  the  other,  a  part  of  a  million  dollar  estate.  The  court 
intimated  that  if  the  contrary  interprctation.which  it  discarded, 
should  be  given  to  the  act,  it  would  be  unconstitutional  as 
"  bringing  about  a  profound  inequality  which  would  transcend 
the  limitations  arising  from  those  fundamental  conceptions  of 
free  government,  which  underlie  all  constitutional  systems."" 
This  was  certainly  a  sufficiently  conservative  doctrine,  al- 
though Justice  Harlan  was  alone  in  upholding  the  other  inter- 

'  Magoun  r.r.  Ulinnis  Trust  and  S.-ivings  Hank,  170  L'.S.,  p.  294. 
*  lull's  ('ia|>  kailr.Mil  ,■  .t.  lVnn<ylv;;i)i.i.  1(14  I'.S,  p.  2_i7. 
»  Knowltun  vs.  Moiiro.  17S  U.S..  p,  77. 

2S 


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% 


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..  I 


li 


I 


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1 


m 

\  \ 


V  II 


ill 


N 


626 


The  Income  Tax 


prctation  and  contending  that  it  did  not  involve  any  constitu- 
tional inequality.* 

Finally,  in  a  later  passage,  the  court  squarely  faced  the 
question  of  graduated  taxation  in  itself.  "Some  authorita- 
tive thinkers  and  a  number  of  economic  writers  contend  that 
a  progressive  tax  is  more  just  and  equal  than  a  proportional 
tax.  .  .  .  The  grave  consequences  which  it  is  asserted 
must  arise  in  the  future,  if  the  right  to  levy  a  progressive 
tax  be  recognized,  involves  in  its  ultimate  aspect  the  mere 
assertion  that  free  and  responsible  government  is  a  failure, 
and  that  the  grossest  abuses  of  power  are  foreshadowed 
unless  the  courts  usurp  a  purely  legislative  function.  If  a 
case  should  ever  arise  where  an  arbitrary  and  confiscating 
exaction  is  imposed,  bearing  the  guise  of  a  progressive  or 
any  other  form  of  tax,  it  will  be  time  enough  to  consider 
whether  the  judicial  power  can  afford  a  remedy  by  applying 
inherent  and  fundamental  principles  for  the  protection  of 
the  individual,  even  though  there  be  no  express  authority  in 
the  constitution  to  do  so."'  The  court  held,  however,  that 
the  graduation  imposed  by  the  law  of  1898  was  so  reasonable 
as  not  to  expose  the  act  to  any  such  charge  of  arbitrariness 
or  confiscation.  There  was  only  one  dissentient  from  this 
opinion,  and  he  put  himself  on  record  as  entirely  opposed  to 
the  whole  principle  of  progression. 

In  view  of  all  these  considerations,  is  it  not  clear  that  the 
uniformity  objection  is  a  mere  bugaboo  ? 


§  6.    Conclusion 

In  order  thoroughly  to  discuss  all  the  problems  raised  by 
the  constitutional  amendment  it  would  be  necessary  to  go  at 
some  length  into  two  further  problems  :  first,  to  what  extent 
is  the  taxation  of  government  securities  advisable,  even  by 
the  power  that  issue?  them?  and  secondly,  how  far  is  the 
general  scheme  of  an  income  tax  in  itself  to  be  welcomed  .' 
These  matters,  however,  would  lead  us  too  far  astray  here, 


>  17S  us,  p.  111. 


«  op.  at.,  p.  109. 


The  Proposed  Sixteenth  Amendment        627 


and  they  have,  strictly  speaking,  only  an  indirect  connection 
with  the  specific  questions  that  arc  raised  by  the  amendment. 
It  may  be  stated,  however,  that  in  so  far  as  the  question  of 
the  taxation  of  government  bonds  is  concerned,  there  are 
good  arguments  on  both  sides,  and  that  this  question  finally 
resolves  itself  into  a  choice  between  upholding  the  credit  of 
the  government  and  maintaining  exact  impartiality  as  be- 
tween individual  taxpayers.  Most  of  the  European  countries, 
after  a  long  period  of  wavering,  have  now  come  to  the  con- 
clusion that  the  exemption  of  government  securities  from  the 
income  tax  is  on  the  whole  inadvisable,  and  they  are  willing 
to  subordinate  tlie  blight  advantages  which  would  accrue  to 
the  borrowing  power  of  the  government  to  what  they  con 
ceive  to  be  the  far  greater  benefits  of  complete  uniformity  and 
equality  as  among  the  various  classes  of  taxpayers.  The 
tendency  throughout  the  civilized  world  is  away  from,  and 
not  in  the  direction  of,  the  exemption  of  government  se- 
curities. 

So  far  as  the  problem  of  a  general  income  tax  is  con- 
cerned, there  is  perhaps  less  room  for  discus.sion.  Many 
thoughtful  citizens,  indeed,  still  have  their  doubts  as  to  the 
practicability  of  an  income  tax  and  as  to  the  possibility  of  the 
United  States  government  creating  a  really  successful  income- 
tax  measure.  These  points  will  be  taken  up  in  the  next 
chapter.  But  all  these  doubts  must  fade  away  when  the 
question  is  presented  in  all  its  baldness  :  "  Shall  the  govern- 
ment of  the  United  States  be  precluded  from  even  making  the 
attempt  to  levy  an  income  tax?"  To  deny  to  a  great  em- 
pire like  the  United  States  the  possibility  of  utilizing  so 
powerful  a  fiscal  engine  in  times  of  national  stress  would  be 
almost  equivalent  to  advocating  nati(mal  suicide.  At  all 
events,  it  amounts  to  a  deliberate  decision  to  put  the  national 
government  at  an  enormous  disadvantage  at  the  very  time 
when  no  possible  advantage  can  safely  be  neglected.  To 
withhold  from  the  government  of  the  United  States  a  power 
which  is  possessed  by  the  smallest  of  its  coni^>ctitors  would 
be  a  monstrous  folly. 


\  \ 


6a8 


Tfu  Incomt  Tax 


Whether  an  income  tax  is  a  desirable  supplement  to  the 
ordinary  tax  system  of  the  United  States  in  times  of  peace  is 
a  far-reaching  question  which  will  be  discussed  later.  But 
surely  no  patriot  can  afford  to  object  to  conferring  upon  the 
United  States  a  power  which  until  recently  it  was  always 
supposed  to  possess,  and  without  which  its  prosperity  —  nay, 
even  its  very  existence  —  might  possibly  be  menaced.  The 
pending  constitutional  amendment  seeks  to  secure  this  result, 
and  its  adoption  ought  not  to  be  impeded  by  arguments  that 
place  upon  it  an  erronecus  interpretation  and  conjure  up 
dangers  which  a  more  careful  economic  analysis  shows  to  be 
wholly  non-existent.  The  pending  constitutional  amendment, 
even  though  it  does  not  go  so  far  as  some  might  think  wise, 
is  not  only  legally  defensible  and  politically  innocuous,  but  it 
is,  above  all,  economically  sound.  It  is  therefore  from  every 
point  of  view  eminently  desirable. 


J- 


U  t 


5'  M 

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1  i\ 


CONCLUSION 


A  PRACTICABLK  PROGRAMMK 


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■!S? 


0*1 


MKIOCOPV  RESOIUTION  TEST  CHART 

(ANSI  ond  ISO  TEST  CHART  No.  2) 


A  /APPLIED  IIVMGE     In 

S^  '6i3   Eosi    Moin    Sbttl 

g"^  Rochester,   New   York        1*609       USA 

^S  '"')   *82  -  0300  -  Phone 

^S  (716)    288  -  6989  -  Fo, 


CONCLUSION 
A  Practicable  Programme 

Now  that  we  have  studied  the  historical  development  of 
the  income  tax  at  home  and  abroad  and  have  called  attention 
to  some  of  the  general  considerations  whicli  apply  to  the 
topic  it  remains  to  draw  the  conclusion  as  to  the  actual  prob- 
lem v.onfronting  the  American  people.  This  problem  is  really 
three-fold.  In  the  first  place,  we  must  decide  whether,  in  the 
light  of  existing  conditions,  an  income  tax  is  in  itself  desirable 
as  an  adjunct  to  our  tax  system.  In  the  second  place,  assum- 
ing that  the  answer  is  affirmative,  the  next  query  is  whether 
the  income  tax  should  be  a  state  or  a  federal  tax,  or,  per- 
chance, a  combination  of  the  two ;  and  in  the  third  place,  the 
final  and  most  important  question  is  what  kind  of  an  income 
tax  should  we  have  and  how  should  the  administrative  features 
be  elaborated  in  order  to  insure  success. 


§  I .   /j  an  Income  Tax  Desirable  ? 

In  approaching  the  question  as  to  the  desirability  of  an 
income  tax  under  actual  conditions,  we  must  carefully  con- 
sider the  American  fiscal  system  as  a  whole.  Partly  as  a 
result  of  constitutional  restrictions,  but  chiefly  as  a  consc- 
ience of  a  natural  evolution,  there  has  been  in  the  main  a 
separation  between  the  sources  of  state  and  of  national  rev- 
enue. The  commonwealths  started  out  with  a  general  prop- 
erty tax,  or  a  land  tax  which  soon  developed  into  a  general 
property  tax.  The  national  government  began  with  a  system 
of  import  duties,  which  were  exclusively  reserved  to  it.  For 
a  long  time  these  two  sources  of  revenue  sufficed  and  devel- 
oped independently  of  each  other.  During  almost  a  decade, 
at  the  close  of  the  eighteenth  century,  the  tariff  was  supple- 

631 


\   \ 


-i    :• 


A  tt 


632 


The  Income  Tax 


merited  by  an  internal  revenue  system  ;  but  this  was  abolished 
in  1802,  and  was  revived  for  only  a  few  years  during  the 
period  of  the  war  of  18 12.  With  the  advent  of  the  Civil 
War,  however,  the  internal  revenue  became,  and  has  since 
remained,  an  integral  part  of  the  national  fiscal  system.  For 
the  most  part  the  internal  revenue  has  been  derived  from 
indirect  taxes  or  excises.  The  experiment  with  the  so-called 
direct  tax  levied  on  real  estate,  which  worked  fairly  well  in 
1798,  was  less  successful  in  18 13,  and  aroused  such  complaints 
during  the  Civil  War  that  the  tax  was  subsequently  repaid. 
A  century  ago,  amid  primitive  conditions,  real  estate  values 
and  population  were  fairly  proportional  to  each  other;  in 
modern  times,  under  the  influence  of  industrial  changes,  this 
proportion  has  been  so  greatly  altered  that  the  constitutional 
method  of  apportioning  a  direct  tax  would  involve  an  enor- 
mously greater  burden  upon  the  landowner  of  an  agricultural 
state  like  Mississippi  than  upon  the  owner  of  a  precisely 
similar  amount  of  land  in  an  industrial  state  like  Massachu- 
setts. The  direct  real  estate  tax  has  thus  lost  its.  original 
equality,  and  is  as  a  consequence  not  likely  to  be  repeated. 
The  only  other  case  where  the  federal  government  entered 
upon  what  has  come  to  be  considered  the  reserved  fiscal 
domain  of  the  states,  was  that  of  the  inheritance  tax,  levied 
during  the  Civil  War  and  again  during  the  Spanish  war.  In 
the  main,  then,  it  may  be  said  that  the  national  government 
has  chosen  sources  of  revenue  which  are  not  employed  by 
the  state  governments. 

On  the  other  hand,  the  stuces  have  almost  uniformly  re- 
frained from  trenching  on  the  field  of  excises  or  internal 
revenue  occupied  by  the  federal  government.  In  the  case  of 
excises  there  are  exceedingly  few  instances  of  commonwealth 
activity,  as,  for  instance,  in  Delaware  and  Kentucky.  So  far 
as  license  taxes  are  concerned,  we  find  a  somewhat  more 
widespread  activity  on  the  part  of  the  commonwealths,  espe- 
cially in  the  southern  states.  Such  licenses,  however,  have 
been  gradually  abandoned  bv  the  federal  government,  and 
have  come  to  be  reserved  only  for  special  exigencies.     The 


A  Practicable  Programme 


633 


same  observation  may  be  made  with  reference  to  the  only 
other  point  of  conflict,  namely,  the  stock-exchange  tax  in 
New  York,  which  is  analogous  to  the  similar  taxes  imposed 
by  the  federal  government  during  the  Civil  War  and  the 
Spanish  war. 

Taking  it  all  in  all,  therefore,  the  fiscal  practice  of  the 
United  States  has  been  to  distinguish,  for  normal  purposes 
at  least,  ratiier  sharply  between  federal  and  state  sources  of 
income,  the  federal  revenue  tending  more  and  more  to  limit 
itself  to  that  derived  from  customs  duties  and  excises  on 
commodities,  while  the  state  revenue  has  been,  to  an  over- 
whelming extent,  secured  from  direct  taxes  on  property,  both 
individual  and  corporate. 

In  considering,  therefore,  whether  an  income  tax  is  a  de- 
sirable adjunct  to  the  American  tax  system,  we  must  ap- 
proach it  from  both  the  fiscal  and  the  social  point  of  view; 
or,  to  be  more  precise,  since  the  fundamental  object  of  every 
tax  is  really  fiscal,  we  must  study  not  only  its  direct  results  as 
a  producer  of  revenue  but  also  its  incidental  consequences  on 
social  and  economic  progress.    And  this  study  must  further- 
more be  prosecuted  from  the  point  of  view  successively  of  fed- 
eral and  of  state  revenue,  without,  however,  attempting  in  this 
stage  of  our  inquiry  to  decide  as  to  whether  it  ought  to  be  a 
state  or  a  federal  tax.     We  are,  therefore,  really  confronted 
by  four  distinct  questions :    Is  the  tax  needed  for  revenue .' 
Is  it  needed  for  elasticity  .'     Is  it  needed  for  purposes  of  com- 
pensation ?     Is  it  needed  for  purposes  of  local  tax  reform .' 
In  the  first  place,  then,  what  are  the  revenue  considera- 
tions attaching  to  the  income  tax  ?     So  far  as  national  taxa- 
tion is  concerned,  it  will  scarcely  be  doubted  that  the  income 
tax  is  not  needed  —  at  all  events  not  for  purposes  of  normal 
revenue.     For  over  half  a  century  before  the  Civil  War,  all 
the  necessities  of  the  federal  government  were  met  by  the 
tariff;  and  since  then  the  interna!  re  /enue,  which  was  imposed 
to  defray  the  war  expenses,  and  retained  to  pay  the  interest 
and  principal  of  the  debt,  has  been  continually  reduced  in 
the  rate  of  tax  and  restricted  in  the  choice  of  commodities 


f   i 


\    M 


634 


The  Income  Tax 


subject  to  tax.  For  several  decades  before  the  Civil  War  the 
tariff  was  primarily  a  tariff  for  revenue ;  since  then  it  has  be- 
come a  tariff  for  protection,  with  incidental  revenue.  This 
is  not  the  place  to  consider  the  merits  of  protection  versus 
so-called  free  trade;  but  it  is  reasonably  certain  that  in  the 
form  either  of  a  ^  rotective  or  of  a  revenue  tariff,  the  customs 
duties,  in  addition  to  a  moderate  and  restricted  application  of 
internal  revenue  taxes,  will  continue  to  suffice  for  ordinary 
purposes.  If  in  future  it  should  become  desirable  somewhat 
to  diminish  the  revenue  from  the  tariff,  it  would  be  a  simple 
matter  to  make  good  the  deficiency  by  a  slight  increase  in  the 
rates  of  the  e.xisting  excises,  or  by  a  small  addition  to  the 
articles  subject  to  excise.  We  do  not  often  stop  to  think 
what  an  immense  potential  resource  is  afforded  by  the  excise 
system.  In  a  country  of  the  prodigious  wealth  of  the  United 
States  it  is  no  exaggeration  to  say  that  the  entire  expenses 
of  the  national  government  could  be  easily  met  by  a  system 
of  internal  excises  which  would  even  then  be  moderate  in 
both  rate  and  extent.  Instead  of  reckoning  our  internal 
revenue  by  the  few  hundreds  of  millions,  we  could,  without 
great  difficulty,  reckon  it  almost  by  the  thousands  of  millions. 
Even  when  the  need  for  extraordinary  revenue  arose,  it 
might  in  large  measure  be  supplied  by  further  extending  the 
excises,  and  supplementing  them  by  stamp  and  transportation 
taxes.  It  is  only  in  the  rare  exigency,  when  the  resources 
of  government  are  strained  to  the  utmost  in  a  foreign  war, 
necessitating  a  resort  to  every  conceivable  sort  of  revenue, 
that  a  good  argument  might  be  framed  for  a  national  income 
tax  simply  as  a  revenue-producer.  Such  an  exigency,  however, 
arose  during  the  Civil  War,  and  might  easily  recur.  It  is  this 
argument  which,  as  we  have  seen,i  is  the  convincing  one  as  to 
the  desirability  of  the  passage  of  the  sixteenth  amendment ; 
for  when  worst  comes  to  worst,  no  government  ought  to  be 
without  the  power  of  tapping  every  imaginable  resource. 
The  question,  however,  that  we  are  here  considering  is  not 
whether  the  government  should   possess  the  constitutional 

*  Supra,  p.  627, 


A  Practicable  Programme 


635 


power  to  impose  an  income  tax,  but  whether  a  national  income 
tax  is  really  needed  for  ordinary  revenue  purposes.     Put  in 
this  way,  the  question  must  clearly  be  answered  in  the  nega- 
tive.    As  a  part  of  the  regular  tax  system  of  the  national 
government,  the  income  tax  is  assuredly  not  needed  for  rev- 
enue purposes.  .    . 
If,  however,  it  is  not  needed  for  national  purposes,  is  it 
needed  for  state  purposes }     It  cannot  be  too  often  emphasized 
that  what  we  are  discussing  here  is  not  whether  the  income 
tax  is  a  better  or  fairer  tax  than  any  other,  but  whether  the 
existing  tax  system  works  so  unsatisfactorily  from  the  point 
of  view  of  revenue  that  the  income  tax  is  needed  as  a  supple- 
ment.    It  is  obvious  that  if  we  frame  the  question  in  this  way 
the  answer  again  is  not  doubtful.     Whatever  may  be  the  ob- 
jections to  the  general  property  tax,  it  cannot  be  claimed  that 
it  has  failed  to  secure  revenue.     The  questions  of  a  possible 
inadequacy  of  state  revenue  have  arisen  not  so  much  in  those 
states  which  still  levy  the  general  property  tax  as  in  those 
which,  like  New  York,  have  virtually  abandonid  the  property 
tax  for  state  purposes  and  are  securing  the  necessary  revenues 
in  other  ways.     Even  in  such  states,  however,  an  ample  fund 
may  be  found  in  the  corporation,  the  inheritance,  the  mortgage, 
the  liquor-license,  and  the  stock-exchange  taxes.     Whatever 
force,  accordingly,  there  may  be  in  the  demand  for  an  income 
tax  on  the  part  of  either  the  state  or  the  nation,  it  is  not  to  be 
found  in  the  purely  revenue  argument. 

The  second  possible  argument  is  that  the  income  tax, 
although  not  needed  for  revenue,  is  still  desirable  for  purposes 
of  flexibility  or  elasticity  of  income.  This  function  of  the 
income  tax,  as  we  know,  has  until  recently  been  the  chief 
characteristic  of  the  British  income  tax.  The  strength  of  this 
position  in  general  is  undoubted.  It  is  clear,  however,  that 
the  argument  is  of  slight  consequence  so  far  as  state  income 
taxes  are  concerned,  especially  where,  as  in  the  great  mass  of 
cases,  the  general  property  tax  still  exists.  For  if  there  is  any 
one  good  point  aboui  the  system  of  the  general  property  tax 
for  state  purposes,  it  is  precisely  its  inherent  elasticity.     In 


636 


The  Income  Tax 


v. 


our  various  states  the  process  of  raising  a  revenue  is  simple. 
The  amount  of  revenue  needed  is  known  as  soon  as  the  appro- 
priation bills  have  been  passed.  All  that  is  necessary  is  to 
divide  the  valuation  of  property  in  the  state,  or  in  the  respective 
subdivisions,  by  the  amount  of  revenue  required,  and  the  re- 
sult is  the  tax  rate.  Nothing  could  be  simpler.  Even  in  those 
few  states  where  the  general  property  tax  has  been  abandoned 
as  a  source  of  state  revenue,  the  missing  elasticity  could  be  re- 
introduced .irough  one  of  the  other  taxes.  The  income  tax  is 
therefore  not  needed  for  purposes  of  elasticity  in  the  states. 

In  the  federal  government  the  argument,  although  of  some- 
what more  weight,  is  really  not  strong,  since  we  have  virtually 
no  budget  at  all.  Under  existing  methods  no  attempt  is 
made  to  calculate  closely  and  to  brmg  ibout  a  balance  be- 
tween expenditure  and  revenue  such  as  exists  in  other  civil- 
ized countries.  Under  our  form  of  government,  with  the 
strict  separation  of  powers  and  the  dominance  of  committee 
management  in  Congress,  we  have  become  accustomed  to  a 
series  of  surpluses  followed  by  a  series  of  deficits,  and  we 
pursue  the  wa.stcful  practice  of  making  good  the  deficits  out 
of  the  accumulated  surplus.  Until  an  entirely  different  and 
more  modern  method  of  budgetary  practice  is  introduced  into 
the  national  government,  the  need  of  some  elastic  tax  to  se- 
cure an  equilibrium  between  income  and  outgo  is  not  evident. 
Even  when  that  time  comes,  however,  it  does  not  follow  that 
the  end  can  be  achieved  only  by  the  income  tax.  In  France 
and  Germany  close  budgetary  calculations  are  made,  and  in 
neither  country  is  there  any  national  income  tax. 

VVe  may  therefore  conclude  that  while  the  elasticity  argu- 
ment for  the  income  tax  is  a  fairly  good  one,  it  is  applicable 
only  to  a  national  income  tax,  and  even  there  only  in  part. 

We  come  in  the  third  place  to  a  more  important  problem. 
If  the  income  tax  is  not  needed  for  purely  revenue  purposes, 
and  if  it  is  not  greatly  needed  for  the  purpose  of  elasticity,  is 
it  needed  for  purposes  of  justice.' 

Here  attain  we  must  distinguish  between  state  and  national 
finance.     I^et  us  take  u[)  first  the  national  situation. 


A  Practicable  Programme 


637 


It  has  become  customary  in  modern  times  to  frame  a  gen- 
eral indictment  against  the  entire  scheme  of  customs  duties 
and  internal  revenue  as  unjust  because  it  constitutes  a  system 
of  taxes  on  expenditure.     It  is  this  feeling  which  led  Lassalle, 
a  half  century  ago,  in  his  famous  work  entitled  Indirect  Tixacs 
and  the  Workingman,  to  oppose  such  imposts  ,  and  it  is  some- 
what the  same  idea  which  induced  Shearman  a  generation 
later  to   speak  of    Crooked    Taxation,   by   which   he  meant 
indirect   taxation."      To   this  general   indictment   exception 
may,   however,  be    taken,   for  two    reasons.      In  the    first 
place,  the  scheme  of  taxation  must  be  considered  as  a  whole. 
When  the  burden  finally  rests  upon  the  individual,  it  makes 
very   little   difference   to   him   who   receives    the   proceeds. 
Whether  he  pays  the  amount  to  one  official  or  several  is 
immaterial  to  him  as  long  as  the  amount  does  not  vary.     In 
estimating  the  expediency  of  federal  taxes  on  expenditure  we 
must  therefore  consider  the  state  and  local  taxes,  which  are 
primarily  levied  not  on  expenditure,  but  on  property.     If  we 
assume  — and  for  the  purposes  of  this  argument  it  may  be 
assumed  — that  these  taxes  really  effect   their   purpose,   a 
strong  defence  may  be  made  for  federal  customs  and  internal 
revenue.    For  all  publicists  and  statesmen  agree  that  exclusive 
reliance  on  either  direct  or  indirect  taxes  is  impossible.     To 
secure  the  entire  revenue  for  all  the  various  kinds  of  govern- 
ment—local, county,  state,  and  national  —  from  direct  taxes 
alone  would  under  present  conditions  require  such  an  aug- 
mentation of  the  rate  as  to  exaggerate  the  difficulties,  to  foster 
evasion,  and  to  engender  inevitable  dissatisfaction.     Indirect 
taxes  therefore  may  be  upheld  on  the  simp.le  ground  that 
without  their  aid  the  burden  of  direct  taxes  would  become  a 
crushing  one.     It  is  not  so  much  the  crookedness  as  the  bur- 
densomeness  of  a  tax  which  is  really  important. 

But  indirect  taxes  may  be  defended  for  a  second  reason. 
The  contention  that,  because  direct  taxes  alone  respond  to  the 
principle  of  faculty  or  ability  to  pay,  they  must  be  exclusively 
utilized  for  fiscal  purposes,  involves  a  misconception.     The 

•  Xufitra!  T:i.r,7f!i>'i.     By  Thomas  G    Shearmon.     N'.w  Yurk.  1805.  chap.  ii. 


Ii\ 


638 


The  Income  Tax 


M  i 


II 


principle  of  faculty  has  indeed,  as  we  have  seen  all  through 
this  volume,  a  very  decided  strength  of  its  own.  But,  as  we 
have  pointed  out  elsewhere,'  it  is  not  adequate  to  explain  the 
entire  problem  of  public  revenue.  The  principle  of  faculty 
or  ability  is  primarily  an  individual  principle.  It  attempts  to 
interpret  the  fiscal  relations  of  the  government  to  the  individ- 
ual. Side  by  side  with  the  individual  principle,  however, 
there  has  come  into  the  foreground  in  modern  times  the 
social  principle,  —  the  principle,  namely,  that  the  government, 
in  laying  any  particular  tax,  should  be  guided  by  the  social 
consequences,  —  that  is,  by  the  results  upon  groups  or  classes 
rather  than  upon  individuals ;  or,  to  exp."ss  it  in  another  way, 
that  attention  should  be  paid  not  simply  to  the  immediate  re- 
sults upon  the  individual,  but  also  to  the  wider  conscqucinces 
that  ensue  from  the  fact  of  his  being  a  part  of  society. 

From  this  point  of  view  much  may  be  said  in  favor  of  a 
system  of  customs  duties  and  internal  taxes,  provided  they 
are  taxes  of  the  right  kind.  A  correctly  devised  tariff,  for 
instance,  could,  without  difficulty,  be  so  adjusted  that  the 
b  rden  would  fall  with  comparative  equality  upon  the  com- 
munity as  a  whole.  Even  a  protective  tariff  could  conceiv- 
ably be  so  framed  that  there  would  be  no  undue  or  special 
favors  to  enterprises  that  did  not  deserve  them,  so  that 
whatever  of  truth  there  is  in  the  diversified-industry  argu- 
ment could  be  realized,  thereby  spreading  the  benefits  of  an 
intelligent  protection  over  the  community  as  a  whole,  and 
fostering  the  prosperity  of  all  classes  rather  than  increasing 
the  profits  of  a  few  favored  individuals.  Again,  if  the  tariff 
were  one  for  revenue  only,  the  duties  could  be  so  devised  as 
not  to  press  with  undue  severity  upon  the  consumption  of 
the  poorer  classes,  but  might  be  levied  primarily  upon  articles 
of  lu.xury  and  of  mid'lle-class  consumption. 

Much  the  same  may  be  said  of  a  system  of  internal  revenue 
ta.xcs.     There  is,  indeed,  no  doubt  that  in  the  Middle  Ages, 

'  "  Pending  Pmblems  in  Public  Finance  "  in  Proceediiii:!  of  the  Congresi  of 
Arts  anJ  Sciences,  I'niversal  I'  xposilion,  St.  Louis,  igo^,  vol.  vii,  pp.  191  et  sei{. 
Uuitun,  1906. 


A  Practicable  Programme 


639 


under  aristocratic  influences,  some  of  the  most  hideous  fiscal 
enormities  were  found  in  this  catej^ory,  even  though  it  may 
be  doubled  whether  the  abuses  of  the  indirect  taxes  on  ct)n- 
sumption  in  P'rance  or  Italy  were  really  much  worse  than  the 
abuses  of  the  direct  taxes  on  the  poor.     In  the  face,  however, 
of  general  excises  or  of  the  multiplicity  of  taxes  on  com  nodi- 
ties  the  weight  of  which  rested  primarily  on  the  poor,  it  was 
but  natural  that  the  reaction    should  take  the  form  of   an 
attempt  to  develop  direct  taxes.     But  the  modern  democratic 
movement  in  all  civilized  countries  has  succeeded  in  framing 
a  system  of  internal  revenue  ta.xcs  which  preserves  most  of 
the  good  points  and  eliminates  most  of  the  bad  points  of  the 
older  system.     Kverywhere  the   tendency  is  to  concentrate 
the  excises  upon  a  very  few  articles  which,  like  tobacco  and 
spirituous  liquors,  combine  in  a  marked  degree  the  seemingly 
opposite  qualities  of  luxury  and  of  mass  consumption.     Such 
taxes,  as  in  the  United  States  to-day,  are  not  only  susceptible 
of  affording  an  immense  revenue,  but  accomplish  this  result 
in  a  way  which  does  not  contravene  any  principle  of  justice. 
In  so  far  as  the  tax  tends  to  restrict  consumption,  the  argu- 
ment in  favor  of  these  ta.\es  is  specially  strong,  since  here  if 
anywhere  the  restrictive  effect  of  taxation  is  to  be  welcomed ; 
while   the    prodigious   revenue   derived   from   such    sources 
renders  to  that  extent  unnecessary  the  resort  to  the  higher 
rates  or  the  more  burdensome  kinds  of  direct  taxes. 

The  general  argument,  then,  that  an  income  tax  is  needed 
for  federal  purposes  in  order  to  countervail  the  weight  of  the 
customs  duties  and  the  internal  revenue  taxes,  is  doubly 
weak.  For  in  the  first  place,  if  these  national  taxes  require 
a  compensation,  the  compensation  already  exists,  or  can  easily 
be  made  to  exist,  in  the  state  and  local  propert\-  taxes ;  and 
in  the  second  place,  entirely  apart  from  this,  a  system  of 
customs  duties  and  internal  revenue  taxes  may  be  so  ar- 
ranged as  to  require  little,  if  any,  compensation  at  a!l  to  ll.e 
direct  taxes.  Our  internal  revenue  taxes  are  already  for 
the  most  part  on  the  proper  basis,  and  it  is  not^  entirely 
hopeless  to  expect  that  the  tariff  duties  ma>   grauuaiiy  be 


640 


Tht  Income   Tax 


so  changed  as  to  retain  the  good,  and  to  eliminate  the  evil, 
features. 

In  the  preceding  argument  there  is,  however,  one  impor- 
tant gap.  We  have  proceeded  on  the  assumption  that  even 
if  the  tariff  be  so  changed  as  to  remove  some  of  its  objec- 
tionable features,  a  makeweight  to  the  indirect  taxes  on 
expenditure  exists,  or  can  be  made  to  exist,  in  the  state  and 
local  system  of  property  taxes.  Here,  however,  is  the  diffi- 
culty. In  theory  the  system  of  state  and  local  taxation  is 
calculated  to  reach  the  respective  abilitii:s  of  the  property- 
owners  ;  but  in  practice,  as  has  repeatedly  !>een  pointed  out, 
the  general  property  tax  has  broken  down  completely ;  and, 
especially  so  far  as  personal  property  is  conccied,  the 
wealthier  classes  stand  from  under.  Everywhere  x/e  meet 
the  growing  complaint  that  great  wealth  does  not  boar  its 
share  of  the  public  burden.  If,  then,  the  tariff,  as  it  actually 
exists,  imposes  too  large  a  share  of  the  burden  on  the  expen- 
diture of  the  poorer  classes,  and  if  the  state  and  local  rev- 
enue systems  do  not  succeed  in  reaching  the  abilities  of  the 
more  well-to-do  classes,  the  ;,rgument  becomes  exceedingly 
strong  in  favor  of  some  form  of  tax  which  will  redress  the 
inequality. 

It  is  this  argument  which,  as  we  have  seen,  was  really  at 
the  bottom  of  the  movement  for  the  income  tax  of  1894,  and 
which  explains  the  great  development  of  income  ta.xes  abroad. 
Although  we  may  well  concede  that  the  principle  of  faculty 
is  not  the  only  one  to  be  borne  in  mind  by  the  fiscal  adminis- 
trator, it  is  none  the  less  undeniable  that  a  general  movement 
which  runs  counter  to  the  principle  of  faculty  is  doomed  to 
failure.  Under  exi:  ting  conditions  in  the  United  States  the 
burdens  of  taxatioi  ,  taking  them  all  in  all,  are  becoming 
more  unequally  distributed,  and  the  wealthier  classes  are 
bearing  a  gradually  smaller  share  of  the  public  burden. 
Something  is  needed  to  restore  the  equilibrium  ;  and  this 
something  can  scarcely  take  any  form  but  that  of  an  income 
tax.  Without  prejudicing  the  question  whether  it  should  be 
a  slate  or  a  federal  tax,  it  is  difficult  to  escape  the  conclusion 


A  Practicable  Programme 


641 


that  some  form  of  income  taxation  is  needed  to  redress  exist- 
ing inequalities. 

We  come  finally  to  the  fourth  possil)le  arj;umcnt  in  favor 
of  an  income  tax.  Wc  have  called  attention  to  the  break- 
down of  the  general  property  tax  in  .state  and  local  taxation. 
In  almost  all  our  states  there  is  such  a  diviisjty  between 
the  legal  .system  and  the  practical  situation  that  the  attempt 
to  assess  personal  property  gives  rise  to  the  most  striking; 
abu.ses  and  the  most  shocking  injustice.  The  efforts  on  the 
part  of  tax  reformers  to  bring  about  a  change  in  the  law  liavt' 
heretofore  failed,  very  largely  because  of  the  perfectly  ix- 
plicable  feeling  on  the  part  of  the  great  mass  of  the  voters 
that  the  wealthier  classes,  with  their  great  ownership  of 
personal  property,  should  in  some  way  be  made  to  bear  their 
.share  of  the  burden.  Unfortunately  the  attempt  to  accom- 
plish this  laudable  result  by  a  strict  enforcement  of  the  local 
property  tax  has  turned  out  to  be  a  dire  failure.  If  now  the 
average  citizen  could  see  that  the  wealthier  classes  were 
actually  subject  to  some  form  of  income  taxation,  even  if 
they  paid  this  tax  to  the  state  or  to  the  federal  government, 
rather  than  to  the  local  government,  the  oj)position  to  a 
reform  of  local  ta.xation  on  sound  lines  would  very  largely 
disappear,  and  it  would  doubtless  bo  far  easier  to  effect  a 
readjustment  of  the  entire  fiscal  system  without  the  present 
complications  of  a  general  property  tax.  It  is  significant  that 
this  is  precisely  what  happened  in  England.  There  the  local 
taxes  were  for  a  long  time  assessed  on  personalty  as  well  as 
realty,  and  the  attempt  to  confine  the  local  rate  to  real 
estate  met  with  somewhat  the  .<;ame  difficulty  that  is  en- 
countered at  present  in  the  United  States.  It  was  not  until 
shortly  before  the  middle  of  the  nineteenth  century  that 
the  local  taxes,  or  rates,  as  they  arc  called,  were  limited 
to  real  estate;  and  it  was  cnly  a  few  years  prior  to  this 
that  the  national  income  tax  was  imposed.  To  ascribe  to 
these  events  the  character  of  cause  and  effect  would  doubt- 
less be  extravagant ;  but  it  is  scarcely  open  to  doubt  that 
the  opposition  to  the  change  in  the  systen.  ot  local  taxation 


642 


The  Income  Tax 


would  have  been  far  more  pronounced  had  there  not  been 
in  existence  some  method  of  reaching  the  income  from 
personal  property.  Is  it  too  much  to  hope  that  a  similar 
result  will  ensue  m  the  United  States  ? 

To  sum  up :  We  have  seen  first  that  the  income  tax  is  not 
needed  tor  purposes  of  revenue  in  either  the  state  or  the 
nation  ;  and  in  the  second  place,  that  the  elasticity  argument 
does  not  hold  good  at  all  in  the  state,  and  is  of  very  slight 
weight  in  the  nation.  We  have  seen,  in  the  third  place,  that 
the  compensatory  or  makeweight  argument  has  been  con- 
siderably exaggerated,  and  that  if  the  tariff  were  altered  on 
correct  lines,  and  if  the  system  of  state  and  local  taxation 
could  be  changed,  as  might  well  be  the  case,  the  income  tax 
would  then  not  be  needed  for  either  state  or  local  purpo;5es. 

But  on  the  other  hand,  it  is  obvious  that  there  is  no  im- 
mediate likelihood  of  a  fundamental  change  in  the  tariff,  and 
we  have  learned  that  the  system  of  state  and  local  taxation  is 
becoming  in  some  respects  progressively  worse  rather  than 
better.  In  the  face  of  this  situation  the  argument  for 
some  kind  of  an  income  tax  becomes  very  strong.  When  we 
join  to  this  argument  the  further  consideration  that  the 
adoption  of  an  income  tax  would  not  only  tend  to  redress 
existing  inequalities,  but  would  also  in  all  probability  n".  ike  a 
reform  of  our  entire  system  of  state  and  local  taxation  more 
easy  of  accomplishment,  the  arguments  in  favor  of  the  adop- 
tion of  an  income  tax  acquire  additional  weight.  When, 
finally,  we  add  to  these  considerations  the  reflection  that  the 
income  tax  is  in  harmony  with  a  pronounced  tendency 
throughout  the  civilized  world,  and  that  wherever  we  find  the 
spread  of  democracy,  we  find  the  growth  of  income  taxation, 
the  argument  for  the  adoption  of  some  form  of  income  tax 
becomes  well-nigh  irresistible. 

§  2.    Shall   the   Income   Tax  he  a  State  or  a  Federal   Tax  ? 
If,  then,  an  income  tax  is  a  desirable  adjunct  to  the  Ameri- 
can fiscal   system,  the  next  problem  is.  shall  it  be  a  federal 


A  Practicable  Programme 


643 


or  a  state  tax  ?  This  question  is  now  becoming  an  acute  one 
because  of  the  emergence  of  the  demand  for  a  state  income 
tax  in  one  or  two  of  our  western  commonwealths.  In  a  pre- 
vious chapter,  ^  we  have  already  touched  upon  this  question  to 
a  certain  extent ;  but  it  seems  wise  to  consider  the  problem 
here  from  a  somewhat  broader  point  of  view. 

In  order  to  help  us  to  form  a  conclusion,  four  sets  of  con- 
siderations must  be  borne  in  mind.  First,  what  is  the  basis 
of  the  tax  t  Second,  what  are  the  chances  of  admnustrative 
success  ?  Third,  how  far  is  the  problem  complicated  by  con- 
siderations of  double  taxation  .'  And  fourth,  are  there  any 
dangers  involved  to  the  fiscal  autonomy  of  the  states.'  Let 
us  take  up  these  points  in  order. 

In  the  first  place,  the  problem  of  the  basis  of  taxation  m- 
volves  the  question  as  to  whether  a  given  source  of  revenue 
is  raturally  more  suitable  for  utilization  by  one  tax  jurisdic- 
tion rather  than  by  another.     It  is  obvious  that  in  proportion 
as  the  basis  of  a  tax  is  more  widely  extended,  the  argument 
in  favor  of  its  utilization  by  the  broader  tax  jurisdiction  be- 
comes correspondingly  stronger.  ^     One  of  the  chief  reasons, 
for  instance,  why  a  tax  on  real  estate  is  not  employed  by  the 
central  government  is  because  the  basis  is  so  narrow.     And 
it  is  largely  because  the  tax  on  real  estate  is  unsuitable  even 
for   state   revenue   that  it  is  in  many  places  gradually   be- 
ing relegated  to  the  local  jurisdictions.     In  the  United  States, 
at  ah  events,  there  is  no  doubt  that  a  tax  on  real  estate  is 
obviously  unfitted   for  the   federal   government.     We   have 
had  but  three  instances  of  such  a  federal  tax,  and  the  last 
experiment  was  so  unsuccessful  that  its  repetition  is  exceed- 
ingly doubtful. 

While  real  estate,  with  its  narrow  basis,  stands  at  one  ex- 
treme of  the  scale,  we  find  at  the  other  extreme,  with  a  very 


*    I 


1  Supra,  p.  426  el  icq. 

•->  Kor  an  clahnration  of  this  point  see  the  article  by  the  present  wnter.  The 
Relations  uf  State  an,l  Icleral  Hnance,"  in  ^tatc  .n,J  /„,„//„.„,/„.„.  J h,nt 
Inurnational  Conference.  International  Ta.  .Issoaat.on,  Columbus,  .910.  pp. 
212  et  sei/. 


11 


hi 


644 


The  Income  Tax 


wide  basis,  articles  of  general  consumption.  The  widest  pos- 
sible basis  is  afforded  by  commodities  of  so-called  mass  con- 
sumption, Hive  tobacco  and  spirituous  beverages;  and  we 
accordingly  find  that  in  the  United  States,  as  everywhere 
else,  taxes  on  these  commodities  are  reserved  for  the  use  of 
the  broadest  tax  jurisdiction.  Almost  without  exception  the 
American  states  have  voluntarily  refrained  from  utilizing  this 
source  of  revenue  because  of  the  obvious  unsuitablencss  for 
state  purposes  of  taxes  on  consumption.  The  same  is  true 
to  a  still  greater  extent  of  customs  duties,  which  are  almost 
everywhere  kept  for  national  or  federal  use.  So  strongly 
were  these  conditions  of  suitability  present  in  the  minds  of 
our  forefathers  that  the  constitution  not  only  expressly  re- 
served the  employment  of  import  duties  to  the  federal 
government,  but  provided  that  the  indirect  taxes  should 
be  uniform  throughout  the  country.  It  is  clear  that  this 
desirable  uniformity  would  be  completely  lost  if  the  separate 
states  were  to  arrogate  to  themselves  this  important  source 
of  revenue. 

In  between  the  land  tax  on  the  one  hand  and  the  indirect 
taxes  on  consumption  on  the  other,  lie  the  general  property 
and  income  taxes.  So  far  as  the  general  property  taxes  are 
concerned,  these  everywhere  started  out,  as  we  know,  as  local 
taxes,  and  for  a  long  time  remained  suitable  for  such  pur- 
poses. For  not  only  did  the  general  property  tax  coriprise 
land,  which  is  an  especially  good  source  of  local  revenue,  but 
the  remaining  constituent  elements  of  property  consisted  very 
largely  of  articles  of  personalty  which  were  visible  and  tan- 
gible, and  thus  had  a  local  situs.  We  have  learned,  however, 
how,  with  the  development  of  commerce  and  industry  and 
with  the  splitting  up  of  personalty  into  property  no  longer 
found  in  the  immediate  neighborhood  of  the  owner,  and 
especially  with  the  appeara.  jc  of  intangible  personalty  on  a 
conflderable  scale,  the  local  property  tax  became  less  and 
less  successful,  until  it  everywhere  broke  down.  In  the 
I  nitcd  States  today  we  are  in  this  unsuccessful  stage  of  the 
general   property   tax  very   largely  because  of  the  fact  that 


A  Practicable  Programme 


645 


we  employ  the  old  local  administrative  methods,  whicli  liave 
become  entirely  unsuitable  to  modern  conditions. 

The  same  may  be  said  of  the  income  tax.  If  there  is 
anything  that  may  be  considered  a  weil-scllled  induction 
from  experience,  it  is  that  an  income  tax  is  less  success- 
ful as  the  basis  of  the  tax  becomes  narrower.  In  former 
times  a  local  income  tax  was  fairly  workable,  because  in(  omcs 
were  chiefly  local  in  character.  In  modern  times,  h(jwever, 
the  income  of  the  taxpayer,  and  especially  the  in<  .nne  of  the 
large  taxpayer,  has  very  little  to  d.j  with  the  locality  in  whi<  h 
he  happens  to  live.  If  local  property  taxes  have  broken 
down  in  America  largely  because  of  the  narrowi.ess  of  the 
basis,  local  income  ta.xcs  would  be  still  more  likely  t.j  be  un- 
successful. 

But,  it  may  be  asked,  conceding  that  the  locality  is  too 
narrow   a  basis   for  the  income  tax,  would   n<;t  a  state-   in 
come  tax  be  perfectly  feasible.'      It  may  indeed  be  grante.l 
that  a  state  income  tax  — that  is,  a  tax  levied  and  assessed 
either  by   a   state   board    or    by    local    officials,    adequately 
controlled   by  state   authorities  —  w.juld    coustituic   a    con- 
siderable improvement.     It  may  be  observed,  however,  that 
state  centralization  of    aissessment    in  the   case    of   the    m- 
come  tax  would  have  to  be  something  far  different  from  the 
present  state  boards  of  equalization  empl.^yed  in  coniieetmn 
with  the  general  property  tax.     It  would  be  necessary  for  the 
state  authorities  not  simplv  to  equalize  local  assessme-.tN  but 
to  exercise  from  the  very  outset  a  very  effective  contrel  on  e-r 
the  original  local  assessment. 

The  difficulty  with  the  whole  theory,  however,  \<  v.-.i.  ;  11 
a  state  income  tax  is  preferabi.;  to  a  l.-.a]  ineome  la-x  be- uuse 
of  the  more  extended  basis  of  the  tax,  cannot  tr,e  ar-.mer.t 
be  carried  a  step  further,  so  as  to  result  in  the  eor.^.uMon  that 
a  federal  income  tax  w.uld  be  slill  better  than  a  state  in<  on,e 
tax.  because  of  the  still  ^rea'er  widenin-  of  ti.e  ousisr  ,.1 
fact  if  we  once  depart  from  the  pniiCiple  of  ti.e  lo' .1  ..asis 
for  ihe  income  tax,  there  is  really  no  -.od  haiti-.g-p.aM:  untn 
^.g   .^,^h   th«  national   basis.      Incoii.es  nowadays,  tnrouj^ti 


646 


Tlie  Income  Tax 


the  working  out  of  economtc  forces  over  which  we  have 
no  control,  have  become  national,  and  even  international, 
in  character,  or,  at  all  events,  have  far  transcended  state 
lines.  A  man  may  live  in  one  state,  and  may  secure  his  in- 
come partly  from  real  estate  holdings  situated  in  another 
state,  and  partly  from  investments  in  securities  of  corpora- 
tions whose  earnings  are  derived  in  many  other  states.  How 
would  it  be  possible  for  any  state  administration  successfully 
to  ascertain,  or  adequately  to  control,  such  income  of  its 
resident  citizens .'  There  is,  indeed,  a  distinction  to  be  ob- 
served between  the  newer  or  more  agricultural  and  slightly 
developed  states,  as  compared  with  the  great  commonwealths 
which  contain  the  busy  marts  of  industry  and  commerce,  and 
the  homes  of  capitalists  deriving  their  incomes  from  all  over 
the  country.  It  is  barely  possible  that  in  some  states  of  the 
former  category  a  state  income  tax,  so  far  as  this  particular 
argument  of  basis  is  concerned,  might  work  fairly  well ;  just 
as  there  are  portions  of  the  United  States  to-day  where  the 
local  property  tax  works  fairly  well.  But  it  can  scarcely  be 
open  to  doubt  that  in  the  more  developed  centers  a  state  in- 
come tax  would  be  a  complete  failure,  because  of  the  disparity 
between  the  base  of  the  tax  and  the  control  of  assessment. 

Moreover,  with  the  passing  of  ever\-  successive  year,  as 
the  conditions  in  the  more  primitive  and  undeveloped  com- 
munities began  to  approximate  those  in  the  older  and  more 
industrial  states,  the  difficulties,  would  soon  appear.  Instead 
of  becoming  from  year  to  year  a  better  tax,  according  to  the 
principle  that  old  taxes  are  good  taxes,  it  would,  on  the 
contrary,  tend  to  become  continually  worse.  The  broader 
'he  basis,  the  broader  shoulc'  ' "  the  control  of  assessment; 
the  more  individuals  living  '  a  state  who  have  economic 
relations  outside  of  the  state,  the  more  unsuitable  does  an 
income  tax  become  for  state  purposes.  In  the  United  States 
economic  life  is  fast  becoming  almost  everywhere  a  na- 
tional economic  life,  and  as  a  consequence  incomes  are  com- 
ing more  and  more  to  be  national  in  character.  An  attempt 
to  rnntro!  natinna!  incomes  by  state  methods  does  not  prom- 


A  Practicable  Programme 


647 


ise  much  success.    If  a  state  income  tax  is  better  than  a  local 
income  tax,  a  federal  tax  is  better  than  a  state  income  tax. 

In  the  second  place,  let  us  consider  the  problems  connected 
with  double  taxation.     One  of  the  chief  embarrassments  that 
are  found  in  every  federal  government,  and  which  arc  them- 
selves  another   result   of   the   disparity  of   base   mentioned 
above,  are  those  arising  out  of  conflicts  of  tax  jurisdiction. 
It  is  well  known,  for  instance,  that  the  practical   injustice 
connected  with  the  American  general  property  tax  is  largely 
due  to  this  fact.     Owing  to  the  existence  of  the  legal  fiction 
mobilia  scqnuHtiir  pe rsoiianr,  a   man's   personal   property  is 
supposed  to  be  taxed  in  the  place  of  his  domicile.     This  rule, 
however,  has  suffered  amendment  in  two  important  particu- 
lars.     If  the  personalty  in  question  is  capable  of  a  situs,  it  is 
sometimes  taxed  where  it  is  situated.     In  such  a  case  it  would 
be  taxed  twice  —  once  by  the  state  which  follows  the  first 
rule,  and  again  by  the  state  which  adopts  the  .second  rule. 
Or,  as  is  sometimes  the  case,  the  property  would  not  be  taxed 
at  all,  because  of  the  reverse  rules  adopted  by  each  state  in 
the  frequently  erroneous  belief  that  the   opposite   rule  was 
adopted  by  its  neighbor.     Secondly,  when  we  come  to  the 
question  of  intangible  personalty,  and  more  especially  corpo- 
rate securities,  the  difficulties  multiply.     One  state  may  tax  a 
corporation  where  it  is  legally  domiciled,  that  is,  where  its 
principal  place  of  business  is  to  be  found  ;  another  state  may 
tix  the  same  corporation  where  its  property  happens  to  be; 
a  d  a  third  state  may  tax  the  stockholder  where  he  chances 
t(  reside.     The  same  property  may,  therefore,  be  taxed  three 
ti  les  over,  and  there  may  be  all  manner  of  variations  of  this 
principle.     In  the  case  of  the  inheritance  ta>,  as  it  has  devel 
oped  of  recent  years,  the  opportunities  of  complication  arc 
still  more  numerous:  a  man  may  die  in  one  state,  his  legal 
residence   may   be   in   a   second,  and   his   proiierty  may  be 
located  in  another  state.     In  the  case  of  a  state  income  ta.\ 
the  embarrassments  would  be  greater,  rather  than  less.     A 
man  might  reside  in  one  state,  his  legal  domicile'  might  be  in 
a  second  state,  his  income  might  be  deriv-ed  from  railroad 


i 


648 


The  Income  Tax 


securities  which  may  be  in  a  safe  deposit  vault  in  a  third  state ; 
the  railway  itself  may  have  its  chief  office  in  a  fourth  state, 
and  its  track  may  traverse  several  other  states.  Where  and 
how  should  this  income  be  taxed  ?  There  are  all  possibilities 
of  incciuality,  ranging  from  the  complete  escape  from  taxa- 
tion, which  may  arise  on  the  erroneous  belief  by  one  state 
that  the  income  would  be  assessed  in  some  other  state,  down 
to  the  simultaneous  taxation  of  the  identical  income  by  half 
a  dozen  different  states.  The  possible  combinations  are  al- 
most terrifying  in  their  complexity  ;  and  with  more  adequate 
administrative  methods  on  the  part  of  the  separate  states,  the 
possibility  might  become  a  reality. 

It  may  be  contended,  indeed,  that  these  dangers  of  dupli- 
cate taxation  may  be  averted.  In  some  countries  like 
Germany  the  conflicts  of  state  jurisdiction  have  been  mini- 
mized, as  we  know,i  by  t^g  enactment  of  a  national  law  which 
imposes  upon  the  separate  states  a  certain  degree  of  uniform- 
ity of  action.  It  is  clear,  however,  that  the  American  com- 
monwealths would  not  brook  such  national  interference,  even 
if  it  were  constitutional;  and  it  is  scarcely  open  to  doubt 
that  the  accomplishment  of  the  desired  end  would  require  a 
constitutional  amendment  which  it  would  be  well-nigh  im- 
possible to  secure.  The  other  method  of  avoiding  the  em- 
barrassment would  be  by  interstate  agreements,  based  on 
considerations  of  interstate  comity,  whereby  each  state  would 
bind  itself  to  refrain  from  levying  more  than  its  equitable 
and  proper  share  of  the  tax.  While  this  consummation  would 
be  exceedingly  desirable,  it  may  well  be  doubted  whether  it 
is  at  all  feasible.  For  11  t'le  first  place,  it  would  be  necessary 
to  elaborate  some  general  system  of  equitable  apportionment 
which  would  have  to  approve  itself  to  all  the  states  con- 
cerned ;  and  secondly,  even  if  such  a  principle  were  accepted 
in  theory,  it  would  be  virtually  impossible  to  secure  its  ac- 
coriij)lishment  in  practice.  American  experience  in  many  other 
domains  of  an  economic  character  has  unfortunately  driven 
home  the  lesson  that  the  separate  commonwealths  cannot  be 

•  Supra,  p.  270. 


A  Practicable  Programme 


649 


i 


depended  upon  voluntarily  to  relinquish  any  weapons  which 
may  constitutionally  be  employed  in  the  struggle  of  local  and 
sectional  interests  for  economic  advantage.  Even  if  the 
majority  ct  the  states  could  be  induced  to  enter  into  such  a 
compact,  the  defection  or  refusal  of  a  few  would  be  suffi- 
cient to  defeat  the  whole  scheme.  And  even  if  all  these  diffi- 
culties were  eliminated,  the  attempt  to  levy  a  state  income 
tax,  so  far  as  corporations  are  concerned,  would  still  en- 
counter the  constitutional  obstacles  connected  with  interstate 
commerce. 

In  view  of  all  these  considerations,  is  it  not  hopeless  to 
expect  that  any  state  income  tax  could  solve  the  difficulties 
of  interstate  double  ta.xation  ?  And  is  it  not  a  reasonable 
conclusion  that  the  income  tax  ought  to  be  a  national  tax, 
if  for  no  other  reason  than  that  all  these  difficulties  would  at 
once  vanish  into  thin  air .' 

The  third  consideration  that  confronts  us  is  that  of  admin- 
istrative efficiency.  Irrespective  of  the  difficulties  adverted 
to  above,  would  the  administration  of  a  state  income  tax  be 
as  successful  as  that  of  a  federal  income  tax .' 

Administration  is  one  of  the  sore  points  of  American  public 
life.  It  is  a  trite  saying  that  we  have  solved  many  of  our 
constitutional  problems,  but  have  scarcely  begun  to  attack 
the  administrative  problems.  Administration  in  a  democracy 
is  proverbially  difficult.  In  a  community  where  every  one 
considers  himself  as  good  as  his  neighbor,  resjjcct  for  expert 
knowledge  is  not  likely  to  be  so  great  as  in  an  aristocracy  or 
autocracy.  The  university  professor,  for  instance,  occupies 
a  far  higher  position,  socially  and  financially,  in  Russia  than 
he  does  in  the  United  States.  Not  only  is  democracy  less 
favorable  to  the  dominance  of  the  expert,  but  it  is  abo  less 
favorable  to  administrative  efficiency  in  other  respects.  Per- 
manence of  tenure,  with  all  the  knowledge  that  results  there- 
from, is  difficult  to  secure.  "To  the  victors  belong  the 
spoils"  is  a  principle  which  it  is  not  easy  entirely  to  eradi- 
cate. And  finally,  the  general  attitude  of  the  average  citizen 
to  the  government  official  is  more  likely  to  be  that  of  superior 


.'  11 


650 


The  Income  Tax 


to  inferior,  rather  than  the  reverse.  Where  the  official  knows 
that  he  is  dependent  for  his  continuance  in  office  upon  the 
good  will  of  the  individuals  with  whom  he  comes  into  imme- 
diate contact,  he  is  apt  in  any  doubtful  case  to  decide  the 
question  in  favor  of  the  citizen,  rather  than  of  the  govern- 
ment. Democratic  administration,  in  short,  is  apt  to  be  lax 
and  inefficient  administration. 

This  is,  of  course,  not  necessarily  or  permanently  true.  It 
represents  rather  the  dangers  inherent  in  democracy  —  dan- 
gers over  against  which  are  to  be  set  the  inestimable  ad- 
vantages  of  a  democratic  fo.m  of  government.  But  even 
these  dangers  can  be  met  and  resolutely  overcome.  A  more 
enlightened  and  intelligent  democracy  will  learn  to  value  ex- 
pert knowledge,  and,  through  various  devices,  to  minimize 
the  perils.  The  last  quarter  of  a  century  has  seen  in  many 
domains  a  very  marked  improvement  in  American  adminis- 
trative methods,  and  what  has  been  so  auspiciously  begun 
will,  without  doubt,  be  carried  forward  in  the  future. 

The  progress  that  has  been  made,  however,  has  thus  far 
been  most  noticeable  in  national  administration,  somewhat 
less  so  in  state  administration,  and  not  yet  so  pronounced  in 
local  administration.  So  far  as  the  relations  of  local  and 
central  government  are  concerned,  there  are  in  the  civilized 
world  to-day  three  main  types,  the  characteristics  of  which 
have  recently  been  admirably  portrayed  by  Sidney  Webb.* 
"  On  the  European  continent  we  find  the  local  administration 
entrusted  in  the  main  to  salaried  officials  of  special  training 
and  high  professional  qualifications,  whose  work  is  closely 
supervised  by,  and  completely  subordinate  to,  the  various 
departments  of  the  executive  government.  .  .  .  The  func- 
tions and  powers  of  the  local  councils  are  narrowly  limited; 
and  their  actual  interferences  with  the  day  by  day  adminis- 
tration are,  in  almost  all  cases,  subject  to  the  control  and 

1  In  his  preface  to  J  Watson  Orice,  Xalioiuil  ami  I.ooi!  Finance.  A  Review 
of  the  Relations  lehreen  the  Centra!  ami  I mal  Authorities  in  England,  France, 
Belgium,  and  Prussia  during  the  Nineteenth  Century.     London,  \')\o,  pp.  vii 

et  tC(/. 


A  Practicable  Programme 


65  » 

This  Mr. 


approval  of  the  central  executive  departments. 
Webb  calls  the  Bureaucratic  System. 

At  the  other  extreme  stands  the  organization  of  local  gov- 
ernment in  the  United  States.     Here  "there  is  nothing  m 
the  nature  of  an  administrative  hierarchy,  and  nothing  in  the 
nature  of  a  national  system,  whether  in  education,  sanitation, 
or  means  of  communication.     This,  which  has  its  merits  as 
well   as   its   characteristic   drawbacks,   may  be   termed     he 
Anarchy   of    Local   Autonomy.     It    has   given   the    Lnited 
States  the  worst  local  government  of  any  State  claiming  to 
be  civilized."     Finally,  in  England,  they  "  have,  by  charac  er- 
istic good  luck,  stumbled  on  a  third  arrangement,    which  lies 
midway  between  the  other  two.* 

So  far  as  financial  administration  is  concerned,  there  is  no 
doubt  that  the  United  States  is  suffering  from  this  "anarc-hy 
of  local  autonomy."     The  attempts  to  secure  a  somewhat 

1  Between  .590  an.l  164O  an  organised  national  system  was  in  process  of  de- 
ve,o  .rnt  in  Englan.l.  b.t  "when  this  (with  n.uch  else ,  «..  ^^^^^ 
hea.I  in  .642.  there  remaine.l  only  an  Anarchy  of  Local  ■^""•":'"'>', '^   ^^^  ';  " 

;  ,".h.  -..ico  „t p,.ii,«..  ..»i..«., .  ••*»"«  '»•"••■" '""''"  *, ,  .! 

,1  .'  ,„,  in  \L.I  The  National  (^ovcnmLM,  m  tht  ^.mt^c  ..f  (lio  piM  l.iree- 
:  ^  :  V^e^  rv.^-successively  'hou^hf  the  ri.hts  .^Mnspection.  a.ju 
^upervlLn.  initiat.ve.  oriticism,  and  control  in  rc.p.-ct  of  one  local  serv.ce  after 
another,  and  of  one  kin.l  of  local  governing  body  after  another. 

Mr   \Vebb  goes  on  to  point  out  thai  "in  reality  the  Crant  .n  .Vul  .s  the  ncccs- 
Mr.  Webl.  g.  es  .  n       ,  administerinii  '.'.s  own  business 

^.;r^O.:;^e  other  hand,  the  poorer  --Hies  nee.,  aid  to  V^^Z^. 

government  falling  upon  them  as  a  crushing  burden,    th.    srna  > 

^ccuire   the   counsel  and  information  of  wider   •^^''-^\;J^^,^  ,he 

United  States."—  0/.  a/.,  p-  x. 


'I?' 


652 


The  Income  Tax 


greater  centralization  of  administration  have  been  only  par- 
tially successful.  In  the  few  cases,  however,  where  the  ex- 
periment has  been  tried,  it  has  been  successful.  The  trans- 
fer of  the  liquor  licenses,  for  instance,  from  local  to  state 
administration  in  New  York  proved  to  be  an  undoubted  suc- 
cess from  every  point  of  view. 

But  while  the  state  administration  is,  in  certain  respects, 
undeniably  superior  to  the  local  administration,  it  is  only 
relatively  good ;  and  the  same  reasons  which  make  local 
administration  inferior  to  state  administration  render  state 
administration  in  some  respects  inferior  to  federal  adminis- 
tration. The  corruption  and  inefficiency  in  our  American 
municipalities  have  become  a  byword,  but  while  striking  im- 
provements have  recently  been  effected,  the  situation  is  not 
very  much  better  in  the  state  than  in  the  city.  The  frauds 
connected  with  the  building  of  the  state  capitols  in  Harris- 
burg  and  Albany  and  the  notorious  influence  of  the  state 
machine  on  administrative  methods  in  almost  all  our  common- 
wealths arc  cases  in  point.  The  federal  administration,  on 
the  other  hand,  although  by  no  means  beyond  criticism,  is 
greatly  superior  to  state  administration.  Compare,  for  in- 
stance, the  administrative  methods  of  the  enlargement  of  the 
Erie  Canal  under  state  auspices  with  the  construction  of  the 
Panama  Canal  rnder  federal  auspices.  From  the  very  nature 
of  the  case,  in  tact,  federal  administration  is  apt  to  be  more 
successful  than  state  administration.  Not  only  is  it  easier  to 
secure  expert  assistance  for  the  larger  problems  involved  in 
national  expenditure,  but  the  contact  between  official  and 
citizen  is  not  so  likely  to  have  that  intimate  relationship  which 
would  exist  in  the  smaller  administrative  sphere.  Above  all, 
the  influence  of  the  party  boss  and  of  machine  methods  is 
obviously  less  pronounced  in  proportion  as  the  sway  of  gov- 
ernmental operations  becomes  broader.  The  income  tax 
needs  for  its  successful  operation  a  far  greater  degree  of 
administrative  efficiency  than  any  other  source  of  revenue, 
and  it  may  be  added,  than  almost  an_y  other  branch  of  gov- 
ernment activity.    Where  the  relations  with  the  individual  are 


A  Practicable  Programme 


653 


so  delicate  and  where  the  opportunities  for  connivance  and 
fraud  are  so  immense,  the  steadiness  and  reliability  of  the 
administrative  machinery  become  of  especial  importance. 

Bearing  these  considerations  in  mind,  it  is  clear,  therefore, 
that  a  local  income  tax,  considered  purely  from  the  point  of 
view  of  administrative  efficiency,  would  be  the  least  successful 
of  all ;  that  a  state  income  tax,  while  indubitably  sujjerior  to 
the  local  income  tax,  would  still  be  relatively  unsatisfactory ; 
and  that  to  secure  the  best  results  it  would  be  necessary  cither 
to  have  a  very  strong  national  control  over  the  state  adminis- 
tration —  a  control  which  is,  in  all  probability,  impossible 
under  our  constitution  —  or,  as  an  alternative,  a  direct  federal 
administration  of  the  tax.  Entirely  apart,  therefore,  from 
any  other  reason,  the  purely  administrative  argument  seems 
to  point  clearly  to  a  national,  rather  than  to  a  state,  income 
tax. 

We  come,  fourthly,  to  the  last  consideration,  namely,  the 
dangers  that  might  accrue  to  the  fiscal  situation  of  the  states 
themselves  by  the  adoption  of  a  state  income  tax. 

It  has  been  repeatedly  pointed  out  that  owing  partly  to  the 
growth  of  modern  expenditure,  and  partly  to  the  gradual 
breakdown  of  the  general  property  tax,  the  American  states 
are  relying,  to  a  continually  increasing  extent,  upon  the 
revenues  derived  from  the  corporation  and  the  inheritance 
ta.xes.  In  some  states,  as  in  New  York,  where  the  general 
property  tax  is  no  longer  utilized  for  state  purposes,  the  cor- 
poration and  the  inheritance  taxes  have  become  entirely 
indispensable.  In  other  states,  where  less  and  less  reliance 
is  being  put  upon  the  state  general  property  tax,  any  din.inu- 
tion  in  the  yield  of  the  inheritance  tax,  and  more  especially 
of  the  corporation  tax,  would  involve  serious  difficulties. 
It  may  be  laid  down  as  a  general  proposition  that  under  the 
present  development  of  American  finance,  both  the  corpora- 
tion tax  and  the  inheritance  tax  are  needed  as  sources  of 
state  revenue. 

If,  now,  the  income  tax  were  to  be  levied  by  the  states, 
rather  than  by  the  federal  government,  it  is  scarcely .  open  to 


(J54 


The  Income  Tax 


doubt  that  the  federal  ({overnmcnt  would  resor  ,  ns  an  alter- 
native, to  cither  the  corporation  tax  or  the  inheritance  tax,  or 
both.  It  was  only  with  great  difficulty  that  the  danger  of 
a  federal  inheritance  tax  was  averted  in  1909  by  the  vigorous 
objection  on  the  part  of  the  various  states.  Hut  the  other 
side  of  the  prediction  has  alreadv  come  true.  We  now  have 
a  national  corporation  tux,  and  wc  know  that  this  was  im- 
posed in  1909  simply  because  of  the  political  difficulties  con- 
nected with  the  enactment  of  a  national  income  tax.'  To 
any  one,  however,  who  realizes  the  difficulties  and  complexi 
ties  of  our  state  finance,  the  permanent  retention  by  the  na- 
tional government  of  a  corporation  tax  in  its  present  shape, 
levied  without  regard  to  analogous  state  taxes,  would  seem  in 
the  highest  degree  undesirable.  Sooner  or  later  the  entering 
wedge  would  be  pushed  farther  in,  until  the  corporations 
would  ultimately  be  almost  entirely  removed,  for  revenue  pur- 
poses, from  the  activity  of  the  states. 

A  state  income  tax,  if  enacted,  would  take  the  place  of  the 
general  property  tax  or  of  a  part  of  it,  so  that  aside  from  the 
greater  administrative  difficulties  connected  with  an  income 
tax  as  compared  with  a  property  tax,  no  serious  increase  of 
revenui  <  ould  be  expected  from  it;  and  in  those  states  where 
the  property  i  iv  has  been  relegated  to  the  local  divisions,  it 
is  unlikely  that  the  localities  would  permit  the  state  to  retain 
mu'h,  if  aiu,  !  an  income  tax  that  might  be  levied  by  it. 
There  woiikl,  therefore,  in  all  probability,  bi  the  same  need 
of  a  St  'te  revenue  from  these  other  sources,  like  corporations 
and  inheritance.  If,  however,  as  would  almost  inevitably  be 
the  case,  the  national  government  should  take  over  one  or 
both  of  these  ta.xes,  the  finances  of  the  states  would  be  thrown 
into  the  utmost  confusion.  Thus,  from  the  point  of  view  of 
the  state  fiscal  conditions  them.selves,  it  seems  highly  desir- 
able that  there  should  be  a  national  income  tax. 

To  recapitulate:  The  four  reasons  why  the  .come  tax 
should  be  federal  rather  than  state  in  character  are,  first,  the 
basis  of  the  tax;  second,  the  avoidance  of  double  taxation; 

>  Supra,  p    -9;. 


A  Prattuable  Programme 


655 


third,  the  administrative  difficulties;  and  fourth,  the  probable 
ensuing  embarrassments  to  the  state  finances  Any  one  of 
these  arguments  would  in  itself  be  sufficient;  taken  together 
their  cumulative  force  must  be  pronounced  overwhelming. 
If  there  is  to  be  an  income  tax  in  the  United  States,  the 
chances  of  success  are  incomparably  greater  as  a  federal  thiui 
as  a  state  tax. 

The  above  exposition,  however,  overI)oks  one  important 
point,  —  namely,  the  question  of  fiscal  necessity.  The  income 
tax,  as  we  have  seen,  is  really  not  needed  by  the  federal  gov- 
ernment, and  although  it  is  in  itself  not  needed  by  the  state 
governments,  it  would  be  needed  to  the  extent  that  it  might 
lead  to  the  abolition  of  the  general  property  tax.  or  at  least 
of  the  tax  on  personal  property.  More()\er,  in  so  far  as 
the  proceeds  of  the  income  tax  might  be  utilized  to  satisfy, 
in  part,  at  all  events,  the  -'  '>'-\  insatiable  demands  of  our 
localities,  and  especially  of  t  ■  cities,  its  fiscal  significance 
would  be  far  from  negligible. 

How,  then,  are  we  to  escape  from  these  two  horns  of  the 
dilemma.'  According  to  Ihe  arguments  advanced  above,  the 
income  tax  should  be  a  federal  tax.  According  to  the  con- 
siderations just  mentioned,  the  income  tax  is  needed  as  a 
source  of  state  or  local  revenue.  What  is  the  way  out  of  the 
difficulty  .' 

The  solution  is  really  not  complicated.  Why  is  it  not  pos- 
sible to  secure  all  the  ends  of  general  suitability  by  having 
the  tax  administered  by  the  national  government  under  direct 
national  supervision,  and  to  secure  all  the  ends  of  adequacy 
and  fiscal  necessity  by  having  the  proceeds  apportioned,  to  a 
large  extent  at  least,  to  the  various  states,  perhaps  to  be  fur- 
ther apportioned  by  the  states  in  part  or  whole  to  the  local- 
ities ?  This  seems  to  be  the  real  solution:  Let  the  national 
govern  iient  assess  the  tax,  and  let  the  state  and  local  gov- 
*;rnments  share  in  the  proceeds  of  the  tax. 

The  same  argument  applies  to  the  corporation  tax  and  to 
the  ir.heritance  tax,  for  in  all  three  ta.xes  the  difficulties  of 
contiicting  tax  jurisdictions  are  becoming,  as  we  have  seen, 


656 


The  Income   Tax 


daily  more  pronounced.     Let  the  federal  government  collect 
the  income  tax,  the  corporation  tax,  and  the  inheritance  tax ; 
and  thus,  at  one  blow,  eliminate  all  the  difficulties  connected 
with  the  escape  of  the  taxpayer  from  the  tax  jurisdiction. 
If  the  federal  government  then  needs,  for  any  special  exi- 
gency, a  part  of  one  or  more  of  these  taxes,  let  it  keep  that 
part,  and  let  it  distribute  the  remainder  among  the  various 
states,  according  to  rules  and  criteria  that  can  without  diffi- 
culty be  elaborated.     Even  if  the  national  government  were 
to  keep  a  part  of  the  proceeds  for  normal  purposes,  the  states 
would  not  suffer ;  for  the  far  greater  administrative  success 
of  federal  assessment  would  lead  to  such  an  enhanced  yield, 
that  the  revenue  accruing  to  tb'    separate  states  from  a  por- 
tion of  the  tax,  under  the  new  system,  would  surely  be  larger 
than  the  proceeds  of  the  whole  of  the  tax  under  the  old  sys- 
tem.    From  the  fiscal  point  of  view,  as  well  as  from  every 
other,  the  states  have  really  nothing  to  lose.* 

This  is  by  no  means  so  new  or  revolutionary  a  suggestion 
as  it  may  appear.  It  is  found,  in  some  form  or  other,  in 
many  countries,  and  in  not  a  few  of  the  American  common- 
wealths. In  England,  for  instance,  the  inheritance  tax  is 
assessed  by  the  central  government,  and  a  part  of  the  pro- 
ceeds of  what  is  known  as  the  estate  duty  is  allotted  to  the 
local  government.  Before  this  plan  was  adopted  in  1888, 
Mr.  Goschen  had  ori^  aally  contemplated  the  scheme  of 
allotting  to  the  localities  additions  to  the  national  income  tax. 
The  principle  of  apportionment  is  continued  by  the  act  of 
1907.  In  France  the  revenue  from  all  of  the  four  leading 
direct  taxes  is  apportioned  between  state  and  localities  by 
the  device  of  the  ccntiuics  additionnds ;  and  the  same  prin- 
ciple is  applied  in  part  in  Italy.     In  Germany  the  proceeds 

1  This  suggesiiun  as  tu  a  division  of  the  proceeds  between  federal  and  state 
governments  was  lirst  made  by  the  present  writer  some  ten  or  tifuen  years  ago, 
in  testifving  l)efore  a  government  commission  on  the  corporation  tax.  The 
principle  there  declared  applicable  to  the  corporation  tax  was  subsetiuently  ex- 
tended bv  him  in  various  essays  to  the  inheritance  tax  and  the  income  tax.  See 
especially  "  The  Relations  of  State  and  Federal  Finance,"  mentioned  iupra, 
p.  643.  from  which  a  n-rt  of  the  following  paragraph  is  taken. 


A  Practicable  Programme 


657 


of  certain  indirect  taxes  are  divided  between  the  federal  and 
the  state  governments,  and  one  of  the  important  features  in 
the  recent  budgetary  scheme  of  the  late  Chancellor  von  Hulow 
was  to  have  a  federally  administered  inheritance  tax,  a  part 
of  the  revenue  to  go  to  the  state.  The  project  now  pending 
for  a  national  unearned-increment  tax  contemplates  a  division 
between  the  nation,  the  state,  and  the  locality.  In  Canada 
it  is  well  known  that  a  large  part  of  the  provincial  revenues 
is  derived  from  th'-,  proceeds  of  taxes  that  arc  levied  by  the 
federal  government.  Other  instances  might  readily  be  men- 
tioned, as  in  the  recent  fiscal  arrangements  of  the  Australian 
commonwealth.  In  the  United  States,  also,  many  of  our 
separate  commonwealths  raise  revenues  which  are  appor- 
tioned to  the  local  administrations.  Even  the  federal  gov- 
ernment, in  the  one  familiar  instance  of  the  distribution  of 
the  surplus,  apportioned  to  the  various  states  the  proceeds 
of  federally  assessed  ta.xes.  The  principle  of  apportionment 
of  revenues  between  central  and  local  authorities  is  hence 
one  that  is  entirely  familiar  to  students  of  finance.  It  may 
be  objected,  indeed,  that  the  constitutionality  of  the  scheme 
is  doubtful.  Our  opinion,  expressed  with  all  due  diffidence, 
is  that  a  constitutional  method  can  be  devised  of  accomplish- 
ing this  result,  especially  if  the  federal  government  retain  a 
portion  of  the  revenue.  But  our  additional  opinion,  expressed 
without  any  diffidence,  is  that  if  constitutional  methods  can- 
not be  devised,  the  sooner  a  constitutional  amendment  is 
procured  the  better  it  will  be.  There  is  really  no  other 
avenue  of  escape  from  the  difficulties  that  are  looming  up  on 
all  sides. 

This  method  of  federal  administration  and  state  and  local 
apportionment  will  accomplish  everything  that  is  needed. 
It  will  conform  to  the  principle  of  efficiency  and  of  suitability, 
because  the  income  tax,  like  the  inheritance  tax  or  the  cor- 
poration tax,  can  best  be  administered  by  the  federal  govern- 
ment, and  because  in  that  way  alone  the  gross  inequalities 
of  state  assessment  can  be  overcome.  While,  on  the  other 
hand,   these    important    incidental  gains  will    be  achieved: 


Jl 


658 


The  Income  Tax 


the  separate  states  will  secure  the  revenue  which  they  need ; 
the  localities  will  no  longer  be  open  to  the  charge  that  per- 
sonalty escapes  assessment;  and  there  will  be  a  lessening 
of  the  resistance  to  the  application  of  so-called  unearned- 
increment  taxes  to  the  real  estate  of  our  cities.  Thus  from  a 
threefold  point  of  view  our  states  and  localities  will  be  en- 
abled to  continue  in  the  path  of  tax  reform  upon  which  they 
have  recently  and  so  auspiciously  entered.  The  important 
point  is  that  some  adjustment  be  reached  whereby  the  legit- 
imate demands  of  equality  and  uniformity  may  be  satisfied 
without  sacrificing  the  ends  of  efficiency  and  adequacy.  The 
interests  of  the  states  must,  at  all  costs,  be  safeguarded;  but 
the  difficulties  inherent  in  a  sta...  administration  of  what  has 
become  national  in  character  must  be  avoided.  The  plan 
outlined  above  will  accomplish  this  end.  In  this  way  and  in 
this  way  alone  can  we  do  justice  to  the  underlying  principles 
of  fiscal  and  social  reform.  In  this  way  and  in  this  way  alone 
can  the  relations  of  local,  state,  and  federal  finance  be  jiut  on  an 
enduring  and  a  completely  satisfactory  basis.  Let  the  income 
tax  be  a  national  tax;  let  the  proceeds  go,  in  part  or  in  whole, 
to  the  separate  commonwealths,  to  be  utilized  as  the  neces- 
sities or  convenience  of  each  state  may  prescribe. 


§  3.   How  Shall  the  Income  Tax  be  Administered? 

We  come,  then,  to  the  final  inquiry,  namely,  what  kind  of 
an  income  tax  shall  we  have,  and  what  are  the  administrative 
provisions  most  likely  to  make  it  a  success.' 

In  the  introduction  to  this  investigation  we  called  attention 
to  the  three  chief  types  of  incc.me  tax:  the  presumptive,  the 
lump-sum,  and  the  stoppage-at-source  tax.  The  rich  experi- 
ence of  the  various  countries  that  we  have  passed  in  review 
enables  us  without  difficulty  to  draw  a  conclusion  as  to  the 
type  best  suited  to  American  conditions. 

The  presumptive  income  tax  -  that  is,  the  tax  founded  on 
presumptions  or  external  indicia  of  income  —  manifestly  pos- 
sesses certain  advantages.     It  requires  but  slight  troublesome 


A  Practicable  Programme 


659 


investigation  ;  it  exposes  the  taxpayer  to  little  inquisitorial 
procedure;  and  it  is  comparatively  easy  to  collect.  It  is  well 
suited  to  a  community  where  the  administration  is  proverbi- 
ally weak,  where  the  differences  of  wealth  arc  not  too  great, 
and  where  public  sentiment  is  unfavorable  to  a  rigid  applica- 
tion of  personal  taxation.  But,  as  we  have  learned,  espe- 
cially from  a  study  of  the  French  conditions,  it  has  serious 
shortcomings.  Unless  the  presumptions  are  exceedingly 
simple,  the  discretion  afforded  to  the  officials  is  liable  to 
abuse.  In  addition,  the  more  complicated  the  society  be- 
coiiies,  the  more  deceptive  are  the  criteria  of  income,  until  in 
the  highest  grades  of  income  they  are  almost  entirely  bereft  of 
si|:  .ficance.  Thus,  while  the  presumptive  income  tax  is,  at 
best,  only  a  very  rough  and  ready  method  of  apportioning 
burdens  according  to  ability  to  pay,  it  becomes  more  and 
more  inadequate,  until  it  finally  reaches  the  point  of  creating 
practical  injustice  as  between  individuals  and  classe  While, 
therefore,  presumptions  or  external  criteria  may  be  utilized 
to  a  certain  extent  in  order  to  check  the  returns  and  t<-  ip 
us  over  some  of  the  difficulties  of  the  exact  ascertainmeuL  of 
individual  income,  the  time  has  gone  by  when  a  system  of 
income  taxation  can  be  erected  on  this  basis  alone. 

The  lump-sum  income  tax  avoids  the  theoretical  weakness 
of  the  presumptive  income  tax,  and  in  several  countries  has 
formed  its  logical  successor.  But  the  administrative  difficul- 
ties connected  with  the  ascertainment  of  the  entire  income  of 
the  individual  in  a  lump  sum  are  exceedingly  great,  and  the 
system  as  a  consequence  requires  for  its  successful  operation 
not  only  a  high  degree  of  adminisirative  efficiency,  but  wide 
and  inquisitorial  powers  conferred  upon  the  officials.  In  only 
one  country  of  the  world  can  the  lump-sum  income  tax  be 
said  to  be  successful,  namely,  in  Germany  ;  and  we  have 
studied  the  peculiar  conditions  which  explain  its  success 
there  —  conditions  which  reflect  both  fav6rably  and  unfavor- 
ably upon  the  social  and  political  life,  and  which  it  would  be 
difficult  to  reproduce,  for  good  or  for  evil,  in  other  countries. 
In  the  two  other  states  of  importance  where  the  lump-sum 


'i-si. 


66o 


The  Income  Tax 


income  tax  has  been  tried,  namely,  Austria  and  Switzeriand, 
it  has  proved  to  be  a  failure ;  and  it  is  Austria  and  Switzer- 
land, rather  than  Germany,  whose  conditions  are  analogous  to 
those  of  the  United  States.  For  in  Austria,  as  in  the  United 
States,  public  .sentiment  is  not  so  much  inclined  to  personal 
taxes  as  in  Germany;  and  in  Switzerland,  like  the  United 
States,  the  prevalence  of  democracy  has  engendered  an  atti- 
tude of  the  ordinary  citizen  to  the  government  very  different 
from  that  which  obtains  in  Prussia. 

Two  other  significant  facts  must  not  be  lost  from  sight. 
The  English  ta.x  was  originally  levied  according  to  the  lump- 
sum idea,  until  the  introduction  of   the   stoppage-at-source 
method  doubled  the  revenue.     The  universal  testimony  of  all 
British  administrators,  as  we  know,  is  to  the  effect  that  their 
system  is  incomparably  superior  to  the  German,  which  they 
had  tried  and  discarded ;  and  that  it  would  be  a  deplorable 
mistake  to  revert  to  the  lump-sum  method.     Furthermore,  it 
will  be  recollected  that  the  French  Chamber,  after  an  exhaust 
ive   discussion   of   the  lump-sum   idea,   decided  that  it  was 
unworkable  in  a  democracy  and   especially  inapplicable  to 
French  conditions.     Finally,  the  experience  of   the  United 
States  during  the  Civil  War,  with  what  was  in  essence  a 
lump-sum  income  tax,  only  serves  to  emphasize  the  lesson. 
A   lump-sum    income   tax  would   strain  American   adminis- 
trative methods  to  the  breaking  point ;  it  would  probably  be 
ineffective  as  a  produce^-  oi  revenue ;  and  it  would  surely  be 
impotent  to  secure  the  relative  justice  which  is  the  primary 
desideratum  of  an  income  tax.      The  lump-sum  idea  might 
indeed  be  utilized  in  a  subordinate  way.  as  is  the  case  both 
in  the  linglish  super-tax  and  in  the  French  complementary 
tax ;  but,  as  the  chief  element  of  the  system  in  an  American 
income  tax,  it  would  be  to  the  highest  degree  undesirable. 

There  remains,  then,  only  the  stoppage-at-source  or  sched- 
ule income  tax.  The  r  'vantages  of  this  method  have  been 
fully  stated  in  our  account  of  the  English  conditions.  It  also 
affords  the  reason  why  the  Italian  income  tax  is  more  suc- 
cessful than  the  A'sstrian  or  the  Swiss.     Even  in  Italy,  it  will 


A  Practicable  Programme 


66 1 


be  remembered,  only  about  four-tenths  of  the  revenue  is 
derived  through  the  stoppage-at-source  method ;  but  since,  in 
these  schedules,  almost  the  entire  amount  of  taxable  income 
is  collected,  while  in  the  other  schedules  the  tax  is  very  much 
of  a  farce,  it  is  no  exaggeration  to  say  that  in  all  probability 
not  more  than  a  quarter  of  the  real  income  of  the  country  is 
secured  by  the  stoppage-at-source  method.  Even  this  small 
percentage,  however,  serves  to  make  the  Italian  tax  more 
successful  than  the  Swiss  or  Austrian  tax.  On  the  other 
hand,  according  to  the  careful  calculations  that  have  been 
made  by  the  French  government,  the  accuracy  of  which  in 
this  respect  has  not  been  seriously  disputed,  at  least  three- 
fourths  of  the  large  revenues  that  are  tu  be  expected  from 
the  French  income  tax  would  be  raised  according  to  the 
stoppage-at-source  idea. 

In   the   United    States    the    arguments   in   favor   of    the 
stoppagb-at-source  income  tax  are  far  stronger  than  in  Eu- 
rope, because  of  the  peculiar  conditions  of  American   life. 
In  the  first  place,  nowhere  is  corporate  activity  so  developed, 
and  in  no  country  of  the  world  does  the  ordinary  business  ot 
the  community  assume  to  so  overwhelming  an  extent  the  cor- 
porate form.     Not  only  is  a  large   part  of   the   intangible 
wea".h  of  individuals  composed  of  corporate  securities,  but  a 
very  appreciable  part  of  business  profits  consists  of  corporate 
profits.     In  the  second  place,  in  no  other  important  country 
are  investments  to  so  great  an  extent  domestic  in  character. 
The  one  great  difficulty  in  England,  a^  we  have  learned,  is 
that  connected  with  foreign  securities.    And  in  France,  where 
the  same  difficulty  exists,  we  have  learned  that  the  projected 
control  of  these  foreign   investments   through   the    French 
bankers  and  agents  forms  the  one  difficult  and  complicated 
point  in  the  scheme.     In  the  United   States,  on  the  other 
hand,  the  situation  is  the  reverse.     Instead  of  our  capitalists 
seeking  investments  abroad,  it  is  the  foreign  capitalist  who 
purchases   American   securities.     We   are,   therefore,    fortu- 
nately exempt  from  the  chief  embarrassment  which  confronts 
Europe  ;  and  there  is  every  likelihood  that  this  situation  will 


662 


The  Income  Tax 


not  be  changed  for  some  time  to  come.  The  arguments  that 
speak  in  favor  of  a  stoppage-at-source  income  tax  abroad 
hence  apply  with  redoubled  force  here.  The  stoppage-at- 
source  scheme  lessens,  to  an  enormous  extent,  the  strain  on 
the  administration  ;  it  works,  so  far  as  it  is  applicable,  almost 
automatically  ;  and,  where  enforced,  it  secures  to  the  last 
penny  the  income  that  is  rightfully  due.  Can  there  really  be 
any  doubt  as  t.  the  preference  to  be  given  to  the  st>ppage- 
at-source  income  tax  over  either  the  lumpsimi  or  the  pre- 
sumptive income  tax  under  American  conditions  ? 

If,  then,  the  income  tax  must  take  the  form  of  the  stop- 
page-at  source  ta.x.  the  question  arises,  how  can  such  a  tax 
be  worked  out  in  detail,  so  as  to  conform  to  American 
condi^^^ions  ? 

The  first  element  in  the  scheme  would  be  the  taxation  of 
incomes  through  corporations.  Corporations  could  be'  utilized 
for  this  purpose  in  a  threefold  way :  In  the  first  place,  the 
tax  could  be  imposed  en  corporate  incomes  as  such.  The 
machinery  for  such  a  tax  is  already  in  operation  in  the  fed- 
eral corporation  tax.  One  necessary  and  fundamental  change, 
however,  would  be  the  abolition  of  the  privilege  of  deducting 
interest  on  bonded  indebtedness.  The  tax  on  corporate 
income  should,  of  course,  be  one  on  the  real  profits  or  gains 
of  the  corporation,  and  the  tax  on  such  profits  would,  if 
assessed  at  the  same  rate,  yield  just  about  double  what  is  now 
secured  ixoxw  the  federal  corporation  tax. 

In  addition  to  the  tax  on  corporate  incomes,  there  should  be 
a  tax  on  the  individual  incomes  secured  from  corporations. 
The  simplest  method  of  accomplishing  this  result  would 
obviously  be  to  have  the  tax  charged  to,  and  paid  by,  the 
corporation,  to  be  thereupon  deducted  from  the  sums  due  the 
security-holder.  The  objection  %yill,  of  course,  at  once  be 
made  that  this  is  double  taxation;  that  it  is  not  legitimate  to 
tax  the  corporation  and  again  to  tax  the  holder  of  the 
security.  This  objection,  however,  is  valid  only  in  part.  Ic 
is  not  valid  nt  all,  so  far  as  the  holders  of  corporate  .londs  are 


VZIBKN^^ 


A  Practicable  Programme 


663 


concerned.  A  tax  on  the  corporation  as  such  may  indeed 
diminish  the  profits  of  the  owner,  —  that  is,  may  reduce  the 
rate  of  dividends  on  the  stock.  But  since  the  interest 
on  bonds  i.-^  a  fixed  and  not  a  contingent  remainder,  a  tax  on 
corporate  profits  would  have  no  effect  on  it,  except,  indeed,  in 
the  very  unlikely  event  that  the  rate  cf  taxation  should  be  so 
confiscatory  as  to  leave  nothing  available  for  fixed  charges,  or 
so  high  as  seriously  to  impair  the  underlying  security  of  the 
bondholders.  As  such  contingencies  are,  however,  not  to  be 
expected,  it  may  be  laid  down  as  a  general  proposition  that  a 
tax  on  the  corporation  is  not  a  tax  on  the  bondholder.  If, 
therefore,  we  desire  to  reach  the  income  of  the  bondholders, 
an  additional  tax  must  be  assessed  on  the  corporation,  with 
the  obligation  to  subtract  it  from  the  interest.  The  i>rivilege 
granted  to  railroad  corporations  during  the  Civil  War  to 
assume  this  tax  themselves  ought  not  to  be  allowed,  for  the 
result  of  such  action  would  be  to  make  the  tax  on  the  bond- 
holder really  payable  by  the  stockholdc.* 

What,  however,  shall  we  say  as  to  the  tax  on  the  stockholder  ? 
If  a  tax  on  the  corporate  income  is  a  tax  on  the  stockholder, 
then  this  additional  tax  would  indeed  be  double  taxation. 
Even  here,  however,  the  situation  is  not  quite  so  simple.  It 
is  by  no  means  a  fact  that  the  entire  income  of  a  corporation, 
after  paying  fixed  charges  consisting  of  interest  on  bonds,  is 
distributed  in  dividcids.  Some  of  the  prcjfits  may  be  put 
into  a  surplus  account ;  another  part  may  be  devoted  to  in- 
vestments in  other  corporations ;  and  so  on.  Ultimately, 
of  course,  the  earnings  will  reach  the  stockholder,  bu.  in  any 
given  year  this  may  be  far  from  being  the  case.  To  say, 
therefore,  that  because  a  cor])oration  advances  the  income 
tax  for  its  stockholders,  it  should  be  exempt  from  a  tax  on 
corporate  income,  would  be  inadmissible.  At  best,  the  corpo- 
ration should  be  allowed  to  deduct  from  its  tax  only  so  much 

'  Many  bonds  now  issued  l)y  corporations  contain  a  stijiulation  that  the  in- 
terest shall  lie  payalile  without  deiluction  for  any  taxes  which  the  corporation  may 
be  reiiuired  to  retain  or  deduct.  This  ilitTiculty  cnn,  however,  be  met  in  all  prob- 
ability by  appropriate  legi.ilation. 


:rMBr/E?<iv£ 


3«Z:«3iS!^^E£Twa>vi\mK;r  ^OiSi 


£j»iweir«i9?tnBBM\r%.eue?'jr^:  -i,%- 


664 


The  Jtuome  Tax 


as  had  actually  been  advanced   in   payment  of   the  tax  on 
stockholders.      In  some  of  the   Kuropean  countries,  as  we 
know    this  result  is  reached  by  a  rough  approximation,  the 
corporations  being   taxed  only  on  the  surplus  over   a   sum 
arbitrarily  fixed  at  throe  and  a  half  or  four  per  cent  of  the 
income,  which  is   supposed  to  represent  the  income  of   the 
shareholder.     But  if   the   shareholder's  tax  is  advanced  by 
the  corporation,  there  is  no  reason  why  we  should  not  prefer 
exact  to  arbitrary  figures.     The  net  result  of   the  situation, 
therefore,  would  be  that  the  corporation  should  advance  the 
income  tax  on  all  interest  and  dividends,  and  that  it  should, 
in  addition,  be  held  to  pay  a  tax  on  its  corporate  income,  not 
deducting  interest  on  debt,  but  being  allowed  a  deduction  for 
the  actual  amount  of  tax  advanced  foi  its  stockholders.     This 
method,  moreover,  should   be   applied   to   all   corporations, 
with  a  few  exceptions  of  an  educational,  scientific,  and  philan- 
thropic character ;  and  even  here  the  exceptions  should  not 
attach   to  such  security-holders  as  seek  to  secure  i.  profit 

therefrom. 

The  third  method  of  utilizing  corporations  would  be  to 
reach  the  officials  and  employees.  We  have  found  that  in 
various  countries  corporations  are  required  to  send  in  the 
names  and  salaries  of  all  employees ;  but  in  only  one  or  two 
cases  has  the  further  step  been  taken  of  requiring  the  corpo- 
rations to  advance  the  tax  and  to  deduct  it  from  the  salaries. 
There  is.  however,  no  reason  why  this  should  not  be  done ; 
and  in  the  United  States,  where  business  salaries  are  to  so 
large  an  e.xtent  corporate  in  character,  the  advantage  would 
be  especially  great.  Every  argument  that  applies  to  the  re- 
tention by  the  government  of  the  tax  on  official  salaries 
would  apply  with  redoubled  force  to  corporate  salaries. 

This  threefold  utilization  of  corporations  through  the  cor- 
poration tax  proper,  the  tax  on  corporate  securities,  and  the 
tax  on  corporate  officials  would  greatly  simplify  the  adminis- 
tration, and  would  result  in  yielding  a  very  substantial  portion 
of  the  entire  income  tax  — a  portion  which  in  the  United 
States  would  be  far  greater  than  anywhere  else. 


A  Practicable  Programme 


665 


In  another  schedule  might  be  put  the  tax  on  government 
salaries,  the  government  being  required  to  withhold  the  tax 
from  tne  salaries,  and  to  pay  it  over  to  the  proper  fiscal 
authorities.  This  plan  was  actually  in  operation  during  the 
Civil  War.  The  only  complication  here  would  arise  from  the 
salaries  of  state  and  local  officials.  Under  our  constitution 
we  have  seen  that  it  is  doubtful  whether  the  federal  govern- 
ment has  the  right  to  impose  such  a  tax,  and  the  dcubt  will 
not  be  entirely  dispelled  by  the  adoption  of  the  sixteenth 
amendment.  If,  however,  it  turned  out  to  be  impracticable 
to  levy  such  a  tax,  the  deficiency  in  the  revenue  would,  after 
all,  not  be  very  great.  On  the  other  hand,  if  such  a  tax  were 
ultimately  declared  constitutional,  which,  as  we  have  scon, 
ought  to  be  the  case,  the  machinery  could  without  great 
difficulty  be  devised  for  enlisting  the  cooperation  of  the  .state 
and  municipal  governments  in  collecting  the  tax. 

Another  schedule  would  embrace  the  income  derived  from 
government  securities.  If  it  were  decided  to  levy  such  a  tax. 
it  could  be  easily  and  automatically  collected,  so  far  as  federal 
securities  are  concerned.  The  question  as  to  the  desirability 
of  taxing  government  bonds  played  quite  a  role,  as  we  remem- 
ber, in  the  early  period  of  the  English  income  tax ;  and  it 
received  a  full  discussion  during  the  deliberations  on  the 
French  income  tax.  Although  much  may  be  said  on  either 
side,  the  weightier  arguments  which  need  not  be  here  repeated 
are,  on  the  whole,  in  favor  of  the  inclusion  of  income  from 
government  bonds  within  the  purview  of  the  tax.  In  so  far, 
however,  as  state  and  municipal  bonds  are  concerned,  the 
same  question  would  arise  as  in  the  case  of  state  and  munic- 
ipal salaries.  The  decision  either  way  would  not  make  any 
very  material  difference  in  the  revenue. 

After  these  schedules  had  been  disposed  of,  here  would 
remain  four  other  chief  classes  of  income :  income  from  real 
estate ;  income  from  securities  other  than  corporate  securi- 
ties;  income  from  business;  and  income  from  professions. 
How  should  these  be  treated.' 

So  far  as  concerns  real  estate,  the  conditions  of  American 


666 


The  Income  Tax 


life  would  not  make  it  necessary  to  distinRuish.  as  does  the 
French  scheme,  between  i)roperty  in  land  and  property  in 
houses.     Nor  would  it  seem  advisable  to  rely  entirely  on  the 
English  or  the  French  model  in  assessing  "statutory,"  or 
constructive,  rather  than  real  income.     At  the  same  time,  the 
difficulties  involved  in  ascertaining  the  exact  income,  espe- 
cially in  the  case  of  agricultural  property,  would  be  almost 
insurmountable,  as  was  shown  by  the  experience  of  the  Civil 
War.     Our  farmers  do  not  keep  books  of  account,  and  any 
attempt  to  introduce  this  method  would  probably  fail.     Ac- 
cordingly, the  best  plan  would  seem  to  be  to  utilize  a  combi- 
nation of  constructive  and  actual  income ;  that  is,  to  calculate 
the  income  roughly  as  a  certain  percentage  of  the  rental  value 
(or  of  the  selling  value),  but  to  permit  proof  that  the  actual 
income  differs  from  the  constructive  income.     Where  it  is 
customary  to  rent  property,  as  is  frequently  true  in  our  cities, 
and  in  not  a  few  sections  of  the  country,  a  certain  proportion 
of  the  rental  value  would  afford  a  reasonably  good  criterion 
of  income ;  where  it  is  not  customary  to  rent  property,  the 
assessed  valuation  of  the  premises  for  the   local  tax,  after 
making   correction    for  the   local  standards   of   assessment, 
would  form  a  fairly  satisfactory  indication.     In  some  Ameri- 
can cities,  for  instance,  real  estate  experts  now  calculate  very 
closely  the  proportion  of  net  to  gross  rent. 

The  tax,  moreover,  ought  always  to  be  collected  from  the 
occupier,  who,  if  he  was  not  the  owner,  should  be  authorized 
to  deduct  the  tax  from  the  rent  paid.  If,  on  the  other  hand, 
the  occupier  was  the  owner,  and  if  there  was  a  mortgage 
outstanding  on  the  property,  the  owner  should  not  be  al- 
lowed any  abatement  of  tax  because  of  interest,  but  should  be 
authorized  and  expected  to  deduct  the  proportionate  amount 
of  tax  from  the  interest  due  to  the  mortgagee.  Finally, 
if  in  any  one  year  the  actual  income  was  less  than  the 
constructive  income,  as  ascertained  on  the  basis  of  rental  or 
selling  value,  the  owner  should  be  permitted  to  prove  this 
fact,  and  thus  secure  a  reduction  of  the  tax.  In  this  way 
not  only  would  the  administration  of  the  schedule  be  much 


//   Practicable  Programme 


667 


simplified,  but  there  would  be  a  practical  assurance  that  the 
government  would  secure  the  entire  amount  of  income  de- 
rived fiom  the  ownership  of  real  estate. 

Whether  it  would  be  desirable  to  have  a  separate  schedule, 
as  in  England  and  France,  for  agricultural  profits  as  divorced 
from  the  ownership  of  the  property,  is  somewhat  doubtiul. 
The  custom  of  renting  agricultural  property  is  far  less  com- 
mon in  this  country  than  abroad,  and  even  where  it  exists  it 
is  probable  that  the  exemption  which  would  no  doubt  be  per- 
mitted in  any  income  tax  law  would  cover  the  great  mass  of 
agricultural  profits  derived  from  rented  property.     If,  how- 
ever, this  should  not  be  the  case,  it  would  be  a  simple  matter 
to  construct  an  additional  schedule,  basing  the  tax  on  the 
constructive  income  of  the  tenant  farmer  according  to  a  cer- 
tain lower  percentage  of  the  gross  rent  paid  by  him,  but  with 
a  similar   privilege  to  substitute  the  actual   income.      Tak- 
ing it  all  in  all,  the  income  tax  on  land  can  be  administra- 
tively so  arranged  as  to  be  operated  with  almost  the  same 
ease  and  simplicity  that  would  be  the  case  in  the  preceding 
schedules. 

The  method  that  has  been  suggested  for  assessing  land 
would,  at  the  same  time,  solve  the  problem  connected  with  the 
taxation  of  the  income  from  securities  other  than  corporate 
securities.  In  the  United  States,  about  the  only  class  of 
securities  of  any  importance,  in  addition  to  corporate  securi- 
ties, are  mortgages  on  real  estate.  The  tax  on  the  mortgage 
might  bo  paid,  as  in  England,  through  the  real  estate  sched- 
ule ;  that  is,  if  the  real  estate  tax  were  paid  by  the  owner,  he 
would  advance  the  tax  on  the  mortgage  and  deduct  it  from 
the  interest.  If  the  tax  were  paid  by  the  occupier,  he 
would  deduct  it  from  the  rent  due  to  the  owner,  who  would 
thereupon  deduct  it  from  the  interest  payable  to  the  mort- 
gageor.  As  the  income  tax  would  be  a  general  tax,  applicable 
to  "all  forms  of  investment,  there  would  be  no  shifting  of  the 
tax  to  the  borrower  in  the  shape  of  an  increased  rate  of 
interest,  as  now  happens  in  the  United  States  where  the  tax 
on  mort-nges  is,  in  practical  operation,  a  partial  or  excessive 


668 


The  Income  Tax 


tax.»  In  this  way  one  of  the  great  difficulties  connected  with 
the  ascertainment  of  intanRibie  personalty  would  be  avoided 
and  the  tax  on  securities  would  be  stopped  at  the  source,  with 
slight  chance  of  any  defection  of  revenue. 

We  come  now  to  the  important  category  of  business  in- 
comes.    Here  it  is  clear  that  the   principle  of  stoppage  at 
source  cannot  be  applied.     This  schedule  is  accordingly  apt 
to  be  the  weak  point  in  any  income  tax.     It  must  be  remem- 
bered, however,  that  this  schedule,  while  doubtless  impon 
would  play  a  less  significant  r6le  in  the  United  States  than 
elsewhere.     For  a  great  part  of  business  incomes  would  al- 
ready have  been  automatically  secured  through  the  corporation 
tax.     In  fact,  it  is  safe  to  say  that  the  schedules  that  we  have 
hitherto  been  considering  would  yield  at  least  three-fourths 
of  the  entire  revenue  to  be  expected  from  an  income  tax.    So 
far,  however,  a',  relates  to  the  assessment  of  business  incomes 
derived  from  individual  enterprises,  certain  devices  could  be 
employed  to  render  the   tax  less   unsuccessful  than  would 
otherwise  be  the  case.     The  rate  in  this  schedule  might  for 
instance  be  made  lower  than  in  the  case  oi'  the  property  in 
comes ;  and  with  a  tax  rate  which  would  in  itself  be  moderate, 
the  further  concession  afforded  to  business  men  wc■.•!^  d     "-'t- 
less  be  productive  of  good  results.     In  the  second  place,  we 
might  take  another  leaf  out  of    the   book  of   the  English 
practice.     In  England,  it  will  be  remembered,  much  use  is 
made,  especially  in  the  larger  towns,  of  the  Additional  Com- 
missioners,   selected    from    the   prominent    business     men, 
willing  to  serve  without  pay.     During  the  period  of  the  Civil 
War  much  dissatisfaction,  as  is  known,  res-  ''^d  from  the  em- 
ployment of  assistant  assessors  and  special  agents  who  were 
for  the  most  part  ordinary,  incxiiert,  and  untrustworthy  under- 
lings, employed  at  a  few  dollars  a  day.     To  put  the  business 
interests  of  a  great  nation  at  the  mercy  of  such  men  would 
be  the  height  of  folly.     On  the  other  hand,  it  is  not  at  all 
chimerical  to  suppose  that,   especially  in   our  larger  towns, 

1  Cf.   Seligman,  The  Shifting  ami  Incidence  of  Taxation,   T,d  edition,  1910, 
PP-  333-337- 


A  Practicable  Projirammc 


Oby 


business  cntcrpriscji  .night  be  arranged  in  broad  classes,  and 
that  one  or  two  prominent  reprcciUativcs  ot  each  class,  pre- 
sumably acquainted  with  the  co.ulitions  of  their  trade,  might 
be  prevailed  upon  to  accept  honorary  positions  as  advisers  to 
the  chief  assessor  in  each  locality.  We  are  now  able  to  secure 
our  best  citizens  without  compensation  for  our  school  boards. 
Why  should  we  not  be  able  to  obtain  men  of  similar  standing 
for  our  assessment  boards.'  Is  it  hopeless  to  expect  tnat 
what  has  been  so  successfully  accomplished  in  other  domains 
of  administration  in  this  country,  and  in  this  parliciil.ir  field 
in  England,  cannot  also  be  accomplisheil  here?  Hut  whether 
this  device  or  some  other  be  employeil,  every  care  must  !ie 
taken,  at  the  outset  at  least,  to  combine  prudence  with  firm- 
ness, and  to  avoid  arbitrary  and  incpii-sitorial  treatment  of  the 
taxpayer,  without  an  undue  sacrifice  of  the  revenue.  If  we 
are  to  have  an  income  tax  at  all  in  the  United  States,  we  must 
be  prepared  to  devote  much  thought  and  attention  to  the  ad- 
ministrative details  of  this  schedule.  Hut  even  at  the  worst, 
this  schedule  would  form,  under  American  conditi(ms,  so 
small  a  part  of  the  whole,  that  even  a  comparative  lack  of 
success  here  would  not  imperil  the  entire  tax. 

There  remains,  finally,  the  subject  of  professional  incomes. 
Here  again  it  nni.-t  be  remembered  that  a  large  part  of  .such 
incomes  in  the  United  States  is  dcri\ed  thiuafth  the  medium 
of  corporations,  institutions,  and  government  service  and 
would  therefore  be  reached  in  full  through  stoppage  at  source. 
So  far  as  other  professional  incomes  are  concerned,  the  same 
devices  might  be  employed  as  in  the  case  of  business  incomes, 
namely,  low  rates,  and  the  utilization  of  honorary  assessors 
from  the  various  professions.  Here  again,  moreover,  the 
aggregate  of  such  independent  professional  incomes  would  be 
comparatively  unimportant. 

If,  then,  the  stoppage-at-source  principle  were  applied,  and 
if  improved  administrative  methods  were  employed  in  the 
schedules  to  which  stoppage  at  source  is  not  applicable,  the 
yield  of  a  federal  income  tax  would,  m  our  opinion,  com- 
pare not  unfavorably  with  that  secured  in  England.      "..I 


m^y^p^^pm-w  ^im^^^'-!^'^ 


670 


T/ie  Income   Tax 


any  attempt:  to  introduce  into  the  United  States  the  methods 
emi)loyed  in  Prussia,  for  instance,  would  most  assuredly  lead 
to  dismal  failure.  The  American  lej,Mslator  has  far  more  to 
learn  from  a  careful  study  of  the  details  of  the  British  law 
and  of  the  French  bill  than  from  any  other  measure,  Ameri- 
can or  Kuropean. 

Three  questions  still  remain  for  solution  — that  of  exemp- 
tion, of  differentiation,  and  of  progression. 

That  an  exemption  of  moderate  amount  is  demanded  by 
modern  conditions  will  be  disputed  by  no  one  ;  and  we  have 
learned  how  the  tendency  in  all  countries  has  been  gradually 
to  raise  the  limit.     With  the  standard  of  life  as  it  exists  in  the 
United  States,  the  exemption  ought  to  be  higher  than  that 
found  elsewhere.    But  to  make  it  as  high  as  was  contemplated 
in  the  law  of  1894  wo  ild,  in  our  oi>inion,  be  a  grievous  error. 
For  if  the  income  tax  is  to  be  utilized  for  revenue  purposes, 
such  an  extravagant   exemption  would  .seriously  impair  the 
fiscal  possibilities.     It  is  like  cutting  off  a  large  slice  from  the 
base  of  a  pyramid  and  leaving  only  the  half  which  tapers  to 
a  point.     Furthermore,  so  great  an  exemption  would  expose 
the  tax  to  the  charge  of  sectional  prejudice,  for  there  would 
then  be  large  nortions  of  the  country  which  would  virtually 
pay  no  tax  at  all.     An  exemption  of   one  or  two  thousand 
dollars  ought  to  be  adequate.     If  that,  however,  prove  unsatis- 
factory, we  might  at  least  introduce  the  English  principle  of 
abatement  in  order  co  permit  a  gradually  diminishing  reduc- 
tion of  tax  between  the  limit  of  absolute  exemption  and  the 
point  of  normal  charge.     If  a  thousand  dollars,  for  instance, 
were  completely  exempt  from  taxation,  progressively  dimin- 
ishing abatements  might  be  made  for  each    successive    tive 
hundred  or  one  thousanc'  dollars,  until  the  normal  rate  might 
be-in  with  four  or  five  Mmusand  dollars.     The  exact  figures 
indeed  are  arbitrary,  but  the  principle  is  clear.     Let  there  be 
a  comparatively  low   limit  of  complete  exemption,   supple- 
mented by  a  system  of  abatemei.ts  reaching  to  a  comjiara- 
tively  high  maximum. 

The  next  point  is  that  01  differentiation.      A  differ'      ial 


A  Practicable  Programme 


671 


rate  of  income  tax  is  advisable  for  two  reasons.  In  the  first 
place,  as  we  have  seen,  a  lower  rate  on  business  and  profes- 
sional incomes  would  be  of  great  administrative  help.  In  the 
second  place,  differentiation  is  demanded  by  considerations  of 
justice.  It  might  ever.  'v.  queried  as  to  whether,  in  the 
United  States,  we  are  vut  ready  jyr  a  further  application  of 
the  differential  princij  .'  *.  1  m  that  recently  adopted  in  Eng- 
land. The  distinction  ';  -t  vc;;n  earned  aiid  uncTncd  incomes 
is  assuredly  a  good  one,  so  fa.  t=  it  goes.  Ikit  we  have  be- 
come accustomed  in  the  United  States,  in  economic  analysis 
at  least,  and  to  a  certain  extent  in  public  recognition,  to  make 
further  distinctions  with  reference  to  the  social  justification  of 
various  classes  of  income.  Thus,  for  instance,  the  incomes  of 
public-service  corporations  are  gradually  being  put  on  a  some- 
what different  footing  from  others ;  and  the  same  considera- 
tion would  apply  to  cases  where  individual  and  corporate  in- 
comes depend,  to  a  large  extent,  upon  other  forms  of  privilege. 
It  will  manifestly  be  a  'considerable  tine  before  such  distinc- 
tions in  the  nature  of  iucomc  are  worked  out  with  sufficient 
precision  to  warrant  their  incorporation  into  law.  But  we  are 
perhaps  even  now  ready  for  a  distinction  between  public-ser- 
vice and  other  corporations.  Even  though  it  would  probably 
be  advisable  to  make  only  slight  distinctions  of  rate  in  the 
income  tax  at  the  beginning,  the  wedge  might  gradually  be 
pushed  further  in. 

Finally,  so  far  as  progression  is  concerned,  it  is  clear  that 
the  adoption  of  the  stoppage-ai  source  scheme  is  incompatible 
with  the  general  plan  of  a  graduated  income  tax.  If  we 
divide  the  tax  into  schedules,  there  is  no  way  of  ascertaining 
the  entire  income  of  the  individual,  and  there  would  therefore 
be  no  justification  in  imjwsing  a  graduated  tax  upon  the 
higher  incomes.  We  could  well  afford  to  be  content  with 
a  successful  income  tax,  even  if  it  be  a  proportional  tax. 
After  the  tax  had  been  in  operation  for  some  time,  it  might 
indeed  be  possible  cautiously  to  introduce  the  principle  of 
giaduation,  through  a  device  similar  to  the  English  super- 
tax or  the  French  complementary  tax.     For  when  the  admin- 


rl 


^^g^^^^^l^^ 


V^'- 


67: 


The  Income  Tax 


istrativc   provisions   of    the  stoppage-at-source   income   tax 
were  once  in  full  operation,  so  tliat  the  government  might 
be  assured  of  its  desired  revenue,  there  would  perhaps  be  no 
insuperable  objection  to  requiring  a  compulsory  declaration 
of  entire  income  from  all  individuals  whose  income  exceeded, 
let  us  say,  ten  or  twenty  thousand  dollars,  and  assessing  a 
somewhat  higher  rate  of  tax  upon  them.     Under  existing 
American  conditions,  however,  not  much  could  be  hoped  from 
such  a  device.     At  best,  if  it  were  utilized  only  as  a  supple- 
mentary measure,  it  would  not  do  much  harm  and  might  result 
in  some  additional  revenue ;  at  worst,  it  would  in  practice  be 
a  tax  only  upon  the  conscientious  and  patriotic  millionaires, 
to  their  manifest  disadvantage  as  compared  with  those  of  an 
opposite  type.     But  unless  graduation  be  utilized  only  as  a 
supplementary  principle,  it  would,  under  actual  conditions,  in 
all  probability  play  havoc  with   the   entire   scheme  of   the 
income  tax  from  the  point  of  view  both  of  revenue  and  of 
justice. 

We  have  come  to  the  end  of  a  long  and  laborious  study ; 
and  it  is  perhaps  worth  while,  in  C(  elusion,  to  emphasize  the 
three  chief  lessons  that  we  have  learned.  In  the  first  place, 
the  income  tax  is  coming.  Sooner  or  .iter  the  constitutional 
or  political  difficulties  will  be  surmounted,  and  the  United 
States  will  fall  in  line  with  every  other  important  country 
of  the  world.  Economic  conditions  have  everywhere  engen- 
dered a  shifting  c^f  the  basis  of  taxable  faculty,  and  democ- 
racy has  declared  that  the  best  criterion,  on  the  whole,  is  to 
be  found  in  income.  Whether  we  like  it  or  not,  the  develop- 
ment is  irresistible,  and  the  income  tax  will  come  to  stay 
until  some  new  criterion  of  ability  approves  itself  to  the 
democracy  of  the  future. 

In  the  second  place,  wherever  an  income  tax  has  been 
introduced  under  conditions  that  were  obviously  not  fatal  to 
success,  the  tax  has  worked  better  from  year  to  year  or  from 
decade  to  decade.  This  is  due  partly  to  the  fact  that  business 
conditions   are  apt  to  adjust   themselves   to  long-continued 


A  Practicable  Programme 


673 


laws,  partly  to  he  fact  that  in  progressive  comnuinitics  a 
gradual  improvement  in  administrative  methods  may  be  ex- 
pected, and  partly  to  the  fact  that  public  sentiment  slowly 
accommodates  itself  to  a  fait  accovipli.  For  the  present 
generation  in  England  or  Germany  to  read  of  the  impreca- 
tions heaped  upon  the  income  tax  by  an  earlier  generation  is 
almost  to  read  an  unfamiliar  language,  so  completely  has 
both  the  governmental  and  the  individual  attitude  changed. 
Is  it  unreasonable  to  expect  that  the  similarly  extreme  oppo- 
sition which  is  still  manifested  by  certain  individuals  or 
classes  in  France  and  in  the  United  States  will  be  regarded 
with  the  same  feelings  of  wonder  by  a  future  generatioi.  ? 

Finally,  the  success  of  an  income  tax  depends,  perhaps 
more  than  almost  any  other  modern  institution,  ui)on  admin- 
istrative machinery.  Simply  to  adopt  the  principe  of  an 
income  tax  and  to  enact  a  law  providing  for  its  imposition  is 
by  no  means  adequate.  If  we  select  the  correct  machinery 
and  elaborate  a  scheme  which  is  in  harmony  with  administra- 
tive possibilities  and  public  sentiment  in  any  particular  coun- 
try, the  tax  will  work.  If  we  choose  the  opposite  course,  and 
attempt  too  much,  the  result  is  bound  to  be  disastrous.  Cer- 
tain methods,  which  promise  well  frt)m  the  point  of  view  of  the 
symmetry  of  the  tax,  v^-ork  badly  amid  a  democratic  envi- 
ronment. We  must  decide  between  ideal  perfection  of  theory 
which  cannot  be  made  to  work  in  actual  life,  and  a  less  ambi- 
tious, but  more  realizable,  programme  of  practical  efficiency. 
The  United  States  has  had  a  sad  trial  with  the  first  alterna- 
tive ;  shall  we  not  profit  now  by  the  lessons  of  experience  and 
choose  the  second .' 


H 


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BIBLIOGRAPHY 


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p. 


^m£Ki^siBaasfes^ftsit^s^s9iisywam^sr^-^^  v^^l* 


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!i  1 


m 


<*i 


-11 

=1! 


..w'>:v>'  >^x&dKsiicar^'7S2<LU£'<c: 


68o 


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11 


■s 


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3.  Anonymous  Work-^  (arranifcd  (hronoloKirally). 

An  Address  to  the  I'eofte  of  Great  Hritain,  extracted  from  the  Bi\hop  of  Ijindaff's 
Pamphlet.     Leeds,  17(>8. 

An  Address  to  the  kight  Hon.  Wil'.iam  Pill,  el( ..  on  Some  Paris  of  his  Adminis- 
tration; occasioned  by  his  Proposal  of  the  Triple  .-1  v  sen  men/  in  the  House  of 
Commons  in  .\oiemher,  /7y7.     I»nil()ii,  n   d.  (i7yHl. 

An  Appeal  to  the  fleiid  and  Heart  of  T.vcry  Man  ami  ir«m<;«  in  Great  Britain, 
respecting  the  Threatened  Trench  li.tasion  and  Ihe  lmporlan<  <■  of  immediately 
coming  fomard  with  Voluntary  Conlrilmlions.     lyonilon,  1  7ijH. 

A  Plan  for  Raising  Ihe  Supplies  during  the  War,  humbly  submitted  to  the  Two 
Houses  of  Parliament,  the  Landed  and  Monied  Interest,  and  to  all  Ranks  and 
Conditions  of  Ihe  People,  capable  of  Contributing  to  the  Expenses  nf  Ihe  Slate. 
London,  1798. 

Consolatory  Thoughts  on  Taxation  or  Contribution,  in  Three  Letters  to  a  Member 
of  the  House  of  Commons.  Hy  the  author  of  Thoughts  on  Taxation  and  a  Xav 
System  of  Funding.     London,  1 708. 

Observations,  etc.,  upon  Ihe  .\cl  for  Taxing  Income;  in  whiih  Ihe  Principle  and 
Provisions  of  the  .id  are  fully  considered,  with  a  Vieu  IoI.k  ilitale  the  Fxecution, 
both  with  Respect  to  Persons  chargeable,  ,ind  the  OjHrrrs  chosen  to  carry  il  into 
F.Jfect.  With  Ihe  .tcl  at  Large.  Tofrther  u-ilh  Ihe  Substance  of  the  Clawes  of 
the  .Issessed  Tax  .let  that  have  a  Referenie  to  this,  an>'  a  Copious  Index,  refer- 
ring both  to  the  .ict  and  Obsenations.    London,  i  7(;(;. 

Observation  upon  the  Am<  nded  .\cl  for  laxiiie,  Imome      I^ndon,  n.  d   I'l-fw). 

Three  Kssays  on  Taxation  of  Income,  -lilh  Remarks  on  Ih-  Lile  .\cl  .if  P  ir:i,iment 
on  That  Subject.  On  Ihe  Sational  Debt;  Ihe  Public  Funds:  ,n  ilu  Probable 
Consequences  of  Ihe  Law  for  Ihe  Sale  of  the  Land  Tax;  and  nii  th  Present 
State  of  .Agriculture  in  Gre.it  Britain.  With  a  Srheine  for  Ih  hnproximml  of 
evrrv  Branch  of  il.  and  Remarks  on  Ihe  Diference  betv-ven  .Xali-oiat  Produce 
and  Consumption.     London,  1700. 

Rniru!  of  the  Arguments  advannd  in  the  House  of  Commons  in  S.ipporl  nf  ihe 
Bill  for  Granting  an  .iid  and  ConlriUulion  for  thi  Pmsrcution  ni  ihe  War.  by 
imposing  Certain  Dulles  upon  Income.     I^jndon.  iroy 

Strong  Reasons  for  Ihe  Continuance  of  Ihe  Property  Tax.  Tn  -.vhii  k  is  added  an 
Estimate  of  the  Sational  Income  recently  made  by  Patrick  Coitjuhe/un.  By  a 
Friend  to  his  Country.     I^)nd()n.  1814. 

Three  most  Important  Objects  Propos.d.     Vork,  1^15. 

Tuv  Letters  to  the  Right  Honourable  Vismiint  Casllereagh.  on  Ihe  Present  Situa- 
tion of  Ihe  Landed  Interest  and  the  Intended  Partial  Repeal  of  the  Income  Tax. 
London,  isio. 


684 


The  Income  Tax 


HI 
If 

i 


Rtmi  or  be  Ruined !  The  Properly  Tax  must  be  abohshed  now  or  a  SUite  In- 
auisition  will  be  established  in  England  r  ever.  The  xr^mcdxfe  Resistance  of 
the  Whole  Sation  shewn  to  be  the  only  Means  of  averim  an  nquisUona.  and 
Perpetual  Income  Tax,  from  which  Mr.  Vansittart  has  declared  no  Class  of 
Society  will  lie  exempted.     With  a  full  Account  of  the  Proceedings  ,n  London. 

rl^T^ronTaxation.  Dedicated  with  the  Most  Profound  Respect  to  the  Right 
Illurable  the  Speaker  a.ul  Gentlemen  of  the  Commons  House  of  Parlu,ment. 

A  ^llf^U>'t]u-7:arl  of  Willon  on  titc  Commutation  of  Existing  Taxes  for  a  Gradu- 
atedZperl.  and  Income  Tax;  connecting  therewith  a  Plan  of  Parhamcniary 
Reform.     By  an  Knglishman.     2d  cd.     London,  1830.  a  1  a    \ 

Property  (not  Income)  the.  ..*.' v  Just  Ground  of  Taxation.     N.  p.,  n.  d.  (1831). 

Suggests  for  Combining  an  improved  System  of  Ta.xatwn,  u,lh  a  wuic  fu- 
sion of  the  Elective  Franchise.    London,  I  S3 1.  .   p     -i  u 

A  Practical  Plan  for  the  Immediate  Annihilation  of  Taxes,  and  Editable 
Liquidation  of  the  Sational  Debt.     By  a  Capitalist.     London,  1832. 

A  Scheme  for  a  Graduated  Property  Tax.     London,  1832. 

The  Property  Tax  the  only  Efectual  Remedy  for  the  Present  Embarrassment  of  the 
Country.     BirminKham,  1832.  ,«,^„,  ,„ 

An  Attempt  to  sheu'  the  Justice  and  Expediency  of  substUulmg  an  Income  or 
Property  Tax  for  the  Present  Taxes,  or  a  part  of  Them;  asafordmg  the  Mo.t 
KqLble.  the  Least  Injurious,  and  (under  the  Modified  Procedure  suggested 
therein)  the  Least  Obnoxious  Mode  of  Taxation;  also,  the  Most  Fair  Advan- 
tageous, and  Efectud  Plans  of  Reducing  the  National  Debt.    [By  Benjamin 

B^ulTra^Dhmicd^^' Being  a  Plain  Letter  addressed  to  the  Workingmenof 
Great  Hrilain  and  Ireland;  explaining  hou-  fifty  Millions  are  y^^rh  raised  to 

pay  tliese  lift'.'  Millions ;  how  they  ought  to  be  raised  and  who  ought  to  pay  them. 

Bv  one  of  the  Council  of  the  Nal'l  Political  Union.     London,  .833- 
OuUines  of  a  Plan  for  A  mending  the  System  of  Taxation.     Birmingham,  1833. 
Tax  on  Capital  and  Fixed  Duty  on  Corn.     London,  1833. 
A  Properlx'  Tax.     The  Justice  and  UtUity  of  a  Properly  Tax,  as  a  fneansof 

Restoring  the  Revenue.  Placing  it  upon  a  Permanent  Basis,  and  AJordmg 

Facilities  for  the  .Dcvelopmenlof  IheCommercial-and  Manufacturing  Resources 

oflkeCountrx.     Bv  a  true  Conservative.     London,  n.  d.  (1839). 
Argument  for  the  General  Relief  of  the  Country  from  Taxation,  and  eventually 

from  the  Corn  Lau's.hv  an  Assessment  on  Property.     London,  1839. 
Arhtoeralie  Taxation;  Its  Present  State,  Origin,  and  Progress,  with  Proposals 

for  Reform.     IKv  Richard  Iliklilch.!     London,  1842.  ,  ,^    „    ^,     , 

Income  Tax.     A  fe^v  Words  to  the  Operative  and  Lower  Classes  of  t^  People  of 

Entand,  upon  Sir  R.  Peel's  Proposed  Income  Tax.    By  One  of  Themselves. 

London,  1842. 
Torv  Taxes.     I^ondon,  1842.  .  .      n    «  11., 

A  Familiar  Treatise  on  Taxation,  Free  Trade,  etc.    Compnsing  Facts  usually 

unnoticed  or  unconsidered  in  Theories  of  Those  Subjects.     With  l^otes  on  Sub- 

jcds  arising  ineideutally.     |By  Alexander  Oibbon.)     I^jndon,  1846. 
Reasons  for  a  Tax  on  Property,  in  Substitution  for  Duties  of  Excise  and  Customs. 

^4  l^i.y^i':  ^cLr!,-:  Rahhaae.  Esq..  in  Reply  to  "  Thoughts  on  the  Principles  of 


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Financial  Reform  Association.     Liverpool,  1852. 

A  Few  Words  on  Behalf  of  the  Middle  Classes  of  England,  on  the  Subject  of  the 
IncomeTax.    London,  1852. 

Equitable  Taxation  and  Representation  on  a  Fixed,  General  ind  clearly  Defined 
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Properly  and  Income  Tax,  Hc/iedule  A  and  Schedule  D.  [By  J.  O.  Maitland.] 
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Debate  in  the  House  of  Commons  on  the  Gradual  Extinction  pf  the  National  Debt, 
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Elements  of  Taxation;  to  which  are  added  a  Summary  of  the  Evidence  adduced 
before  the  Parliamenlary  Committee  on  Ike  Properly  and  Incotne  Tax.  And 
also  a  complete  Analysis  of  llie  Finance  Accounts  of  tlic  United  Kingdom,  for 
the  year  iSji.  By  X  +  Y,  Authors  of  the  Prize  Essay  on  Direct  Taxa- 
tion.    Loudon,  n.  d.  (1853). 

Address  of  the  huome  Tax  Reform  Association  established  at  Birmingham, 
May  jS,  18 jj.     Birmingham,  1855. 

Address  on  the  Present  .Anti-Income  Tax  Agilation;  showing  how  and  why 
Direct  Ta.xalion  is  preferable  lo  Customs  and  Excise  Duties.  By  the  Liver- 
pool Financial  Reform  .\s3ocialion.     New  Series,  no.  ig.     Liverpool,  1856. 

Address  of  lite  Birmingham  Income  Tax  Reform  Association  lo  Ihe  Electors  of 
Great  Britain  and  Ireland,  Feb.  i8$y.     Birmingham,  n.  d.  (1857). 

The  Properly  atid  Income  Tax  Association  lo  Ihe  Taxpayers  of  Ihe  United 
Kingdom.     London,  n.  d.  (1857). 

The  Shade  of  Cocker  and  Ihe  Chancellor  of  Ihe  Exchequer.  A  Dialogue  on  Ihe 
Income  Tax.     London,  n.  d.  (1S58). 

Taxation:  Gross  Injustice  of  Ihe  present  System.  Direct  Taxation  Ihe  true 
Remedy.     By  a  Mill  Owner.     Edinburgh,  1850. 

"The  Income  Ta.t  and  its  Rivals."    Quarterly  Review,  vol.  too  (t86i). 

"Income Tax  Reform."     Weslminstcr  Revird'.  vol.  Ixxvii  (186 j). 

Shall  the  Tax  be  Permanent?  By  the  author  of  Our  DeJicienI  Revenue  and  Ihe 
Income  Tax.     London  (1877). 

On  the  Incidence  of  Taxation,  as  AJccling  Different  Classes  in  the  United  King- 
dom at  Ihe  Present  Time.     By  Investigator.     London,  188.}. 

"The  T\Tanny  of  the  Income  Tax."     Blackwood's  Magazine.  \o\.  178  (1005). 

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C.    OfFICI.\L   DnCTTMENTS    AND   CoMXtKNTARir.-^. 

A  Plain,  Short,  and  Easy  Description  '  the  Different  Clauses  of  Ihe  Income 
Tax  so  as  lo  render  it  Familiar  to  the  Meanest  Capacity.     London,  i7Qg. 

Income.  The  New  Schedule,  as  corrected  and  altered  by  tin-  .Amended  Act  for 
Taxing  Income.  Together  with  an  A  hsiract  of  Ihe  Clauses  of  the  Original  .id, 
that  relates  lo  Ihe  Mode  of  estimating  Income,  and  a  Brief  .\olice  of  Ihe  Provi- 
sions of  the  Amended  Acl;  'uith  a  Variety  of  Examples  calculated  lo  shew  the 
Mode  of  Estimating  Hi.  Different  Descriptions  of  Income,  and  making  llie 
Deductions  according  to  Ihe  Cases  in  the  ScheduU  .     Londi.-i  ( 1  yijo). 

Taxes  on  Income.  .1  Corral  .Uiridgeineiil  of  Ihe  .\cl  impising  a  Tax  on  All 
Income,  lontaining  Those  Clauses  which  principally  ajfect  Landlords,  Tenants, 


U  1 


r 


686 


The  Income  Tax 


1(11 

vi 

i  'l 


[i! 


Oc .  exhibiUd  in  a  Clear  and  Methodical  Manner,  etc    wUh  a  Schedule  for 
Estimating  the  Income  of  Persons  liable  to  he  Assessed.    London  ( 1 799)  • 

An  Exposition  of  the  Act  for  a  Contribution  on  Property,  Professions,  Trades,  and 
Offici:  inJuhthe  Principles  and  Provisions  of  the  Act  are  fMyc^s^^ed 
Jlh  a  View  tofacUitate  in  Execution  both  with  Respect  to  Persons  Chargeable, 
«  Persons  Liable,  to  the  Tax  by  Way  of  Deduction,  and  the  Officers  chosen  to 
carry  it  into  Eject.     London,  1803.  j  n    >.    ,     t.,.  i^- 

Firsl  Report  from  the  Select  Committee  on  the  Income  and  Property  Tax.  to- 
gether with  the  Minutes  of  Evidence  and  Index.    London,  1852. 

Second  Report  from  the  Select  Committee  on  the  Income  ''';^///P"tyTax 
together  with  the  Proceedings  of  the  CommUtee,  Mmutes  of  Evrdence,  Appen- 
dix, and  Index.     London,  1852.  . 

Report  from  the  Select  Committee  on  Income  and  Properly  Tax;  together  with  the 
Proceedings  of  the  Committee,  Minutes  of  Evidence,  and  Appendix.    London. 

T^ly-eigklh  Report  of  the  Commissioners  of  Her  Majesty's  Inland  Revenue  on 

ZhZsundltdManagementfortheYearending^JstMarchmswa^^ 

some  Retrospective  History,  and  Complete  Tables  of  Accounts  of  llie  Duties 

from  1860-70  to  1884-5  inclusive.     London,  1885. 

Forty-third  Report  of  the  Commissioners  of  Inland  Revenue.    London  ,900. 

pTpers  respeciing  the  Local  Taxation  of  Personal  Property  m  Certain  foreign 

Countries  and  Brtish  Possessions.     (Cd.  2098) .     London  1904. 
Report  of  the  Departmental  Committee  on  Income  Tax.    London,  1905. 
Appendix  to  the  Report  of  the  Departmental  CommUtee  on  Income  Tax  with 

Minutes  of  Evidence  taken  before  the  Committee.    London,  1905^ 
Reports  from  His  Majesty's  Representatives  Abroad  respecting  Graduated  Income 

Ta xesin  Foreign  States.     Foreign  Office,  Misc.,  no.  2.    London,  1905^ 
Graduated  Income  Tax  (Colonies).     Return  to  an  Address  of  the  House  of  Com- 
mons, dated  August  u,  1904.    Colonial  Office,  ,96.     I^"do"   'W"     .  ^^    , 
Report  from  the  Select  Committee  on  Income  Tax;  together  with  the  Prcce^mgs  of 

the  Committee,  Minutes  of  Evidence,  and  an  Appendix.     London  1906. 
Berry,  Jabez.     Index  to  Income   Tax  Acts;  being  a  Complete  Guide  to  the 
SMuLs  relating  to  Income  Tax,  from  the  Income  Tax  Act,  1842,  to  the  Finance 
(igoo-io)  Act,  1910.    London,  1910.  ^  .     j    1,     T„k„ 

DowXstephen.  The  Ads  relating  to  the  Income  Tax.  6lh  ed.,  by  John 
Edwin  Piper.     London,  1908.  ,  ,,     ,  r,^ 

Ellis,  A.  M.    Guide  to  the  Income  Tax  Ads  for  the  Lse  of  the  Income  tax- 
payer.   London,  1886. 
Nicholson,  WiUiam.     The  Income  Tax  Ad,  Epitomized  and  Simplified.    Lon- 

Patet,' John.'  The  Income  Tax  Ad.  5  and  6  Victoria,  c.  3S,  '^'ith  an  Explanatory 
Introduction  and  Index.    London,  1842.  a,u  ,.,;,h 

Peacock,  H.  St.  George  and  Campbell,  R.  F.  G.  The  Income  Tax  Acts,  mth 
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Pratt  J  T.     Income  Tax  Law.     8th  ed.  by  J.  H.  Redman.     London,  1910. 

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A.  Signed  Works. 

Abbott,  Aastin.  "The  Income  Tax.  How  it  should  be  paid  by  the  Honest 
Citizen."    /}ci«A<T'i  •V/ago3»n«,  vol.  50  (1895). 

Allen,  L.  "The  Income  Tax  Decision;  an  Answer  to  Governor  Pennoycr." 
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Beach,  J.  K.  "The  Income  Tax  Decision."  The  Yale  Review,  vol.  v 
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Borah,  William  E.  "The  Income  Tax  Amendment."  North  American  Re- 
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Borah,  William  E.  "The  Income  Tax  Sound  in  Law  and  Economics."  The 
Journal  of  Accountancy,  vol.  10  (1910). 

Boutwell,  G.  S.  "The  Income  Tax;  the  Decision  of  the  Supreme  Court." 
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Bullock,  C.  J.  "The  Origin,  Puriwsc,  and  Effect  of  the  Direct  Tax  Clause  of 
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Bullock,  C.  J.  "Direct  and  Indirect  Taxes  in  Economic  Literature."  Po- 
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Carnegie,  Andrew  and  others.  "  Discussion  on  the  Subject  of  the  Income  Tax 
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Carter,  James  C.     Argumentfor  the  Appellee.    Income  Tax  Case,    iv^ashington, 

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Carter,  James  C.  and  Gulliver,  William  C.  Brief  for  the  Continental  Trust 
Company  of  the  City  of  New  York,  Appellee.  Income  Tax  Case.  Washing- 
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Choate,  Joseph  H.  Closing  Argument  on  behalf  of  Complainants,  in  support  of 
the  Contention  that  the  Income  Tax  Law  of  1894  is  Unconstitutional.  Wash- 
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Choate,  Joseph  H.  and  others.  Brief  on  behalf  of  Appellants  in  Support  of 
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August  20,  iSg4,are  Unconstitutional.    Washington,  1895. 

Choate,  Joseph  H. ;  Guthrie,  Wm.  H. ;  Morawetz,  Victor ;  Fox,  Austen  G. ; 
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Clarke,  Samuel  B.  Memorandum  on  the  Taxes  described  as  "Direct"  in  the 
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Dougherty,  J.  Hampton.  The  Proposed  Sixteenth  Article  of  Amendment  to  the 
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Godkin,  E.  L.  "The  Income  Tax  Decision."  Journal  of  Political  Economy, 
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Guthrie,  W.  D.  Opening  Argument  on  Behalf  of  Complainants,  tn  Support  of 
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Gulhric,  William  D.  "No  Taxation  without  Representation."  The  Journal 
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Lewis,  William  Draper.  "The  Constitutionality  of  the  Income  Tax."  The 
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ITALY 


L'ImpSt  sur  les  Revenus  de  la 


Beaufond,  .\.  Papin  LabazordiSre  Ruillier. 

Richesse  Afobiliire  en  Ilalie.     Paris,  1^06.      ■  ^      .„   j- ^ 

Bioglio,  Emilio.   Deir  Imposta  sulla  Renaila  Lettera  al  ConU  CamtUo  dt  Cawur. 

BrunC  Enrico.     VI mposta  sui  Reditti  di  Richezza  Mobile.     Milano  1894. 
Canestrini      La  Scienza  e  V  Arte  di  Stato,  desiinta  dagli  Alt,  officiali  delta  Re- 

publica  Fiorentina  e  dei  Medici.    Ordinamenti  Economici.  -  Delia  Fmanza. 

Parte  I,  L'lmposla  sulla  Richezza  Mobile  e  Immobile.     Florence,  1862. 
Flora,  F. '  Ulmposta  stii  RediUi  di  Richezza  Mobile.     Milan,  1898. 
GarcUi,  A.     Le  ImposU  nello  Stato  Moderno.     Milan,  1903. 
Lia,  A.     Ulmposta  MoUliare  e  la  Riforma  dei  TribiUi  DireUi  m  Italia.    Ordi- 

tlamento,  Fiinziotu.  Proposte.    Turin,  1906.  ,    c.    ■  .j^  n 

Magrini,  M.     V  Imposta  di  Richezza  Mobile  nei  Rapporti  con  le  Societd  Comr 

merci'ali  obbligate alia  Presentazione dei  Bi and.     Milan,  1903. 
Perdrieux    Pierre.     Les  Fraudes  dans  I'lmpdt  Italien  sur  les  Revenits  de  la 

Richesse  Mobiliere,  avec  une  Lettre- Preface  de  M.  Luigi  LuzzaUt      Pans,  1910. 
Quarta,  O.    Commento  alia  Legge  stdV  Imposta  di  Richezza  Mobile.    3  vols. 

Milan,  iqo2.  ,.       „ 

de  Spoclberch,  Le  Vicomte  Olivier.    VImpSt  sur  le  Revenu  en  Italte.    Brus- 

Tivar^ni,  J.     Le  Impost*  Di'rette  stdla   Richezza  MobUiare  e  sid  Reddito. 

Ves^bwsk^'^M.     rimpdt  sur  le  Revenu  Mobilier  en  Italie.    St.  Petersburg, 

Vinci^^iuseppe,     L'Imposta  di  Richezza  Mobile  in  Italia  nel  sua  Funziona- 

mcitto.     Palermo,  1893. 


700 


The  Income  Tax 


SWITZERLAND 

BUcher,  Karl.    BastVs  Slaaiseinnahmen  tind  Steuenertheilung.    Basel,  1888. 
Bullock,  C.J.     "The  General  Property  Tax  in  Switzerland."    State  and  Local 

Taxation,  Fourth  International  Conference  under  the  Auspices  of  the  Inter- 
national Tax  Conference.     Columbus,  191 1. 
C^renv-ille,  Max  de.     Les  Impdts  en  Suisse.     Lausanne,  1898. 
Cohn,  Guslav.     "Intvrae  and   Property  Taxes  in  Switzerland."    Political 

Science  Quarf-rly,  vol.  iv  (1889). 
Cohn,  Gustav.    "  Die  Einkommensteuer  im  Kanton  Zurich."    Jakrhiicher 

fUrNatioiudokonomic  und  Stalistik.    Neue  Folge,  vol.  i  (1881). 
Ernst,  H.     Die  Direktcn  Slaatssteucrn  dcs  KaiUons  Zurich  im  tuumehnten 

Jahrhundert.    Winterthur,  1903. 
Esslen,  Dr.     Die  direkten  Sleuern  im  Kanton  Zurich.     Zurich,  1910. 
Gerloff,   VV.      Die    Kantonale    Besleuerung   der    Aktiengesellschaften    in   der 

Schufiz.     Born,  1906. 
Schanr,  G.     Die  Steuem  der  Sckweis  in  ihrer  Entwickelung  sett  Begtnn  das  iS 

Jahrhundcrts.     Stuttgart,  1890. 
Von  Scheel.      Ueber  Einige  Fra^cn  bctrcjcnd  die  Reform  dcs  SUuerwesens  tm 

Kanton  Bern.     Bern,  1876. 
StciRcr,  J.     Grundziigc  des  Finanzhalles  der  Kantone  und  Gemeinden.     2  vols. 

Berlin,  1903.  . 

Weiler,  Peter  Hans.    Direkle  Staats-  und  Gemeindesteuern  in  der  Schweiz.    Die 

heut'ige  Belastung  ph\sischer  Persunen  durch  dirckte  Staats-  und  Gemeinde- 

sUuem  in  der  Schweiz,  mit  besonderer  BeriicksUhtigung  der  Progression. 

Zurich,  1910. 
Wolf,  Julius.    SUuerreform  im  Kanton  Zurich.    Zurich,  1897. 


i-'ii 


INDEX 


Abatements,  system  of,  in  income  taxation, 
33;   in  English  Act  of  1798  (Triple  As- 
sessment), 65-66;    under  Art  of   lycjo. 
78-70;  under  .\ct  of  1803.  q6  ot  :  under 
Act  of  1806,  101    103;   undir  IVel',;  Aa 
of  1842,  132-133  ;  under  the  law  of  iH-;  i, 
155;  in  1863,  167-16H;  abatements  and 
exemptions  under  Ait  of  i8g4,  iHi ;    in 
i8g8,  184;  grant  of,  aliolished  in  case  of 
persons  residing  outside  of  Cnitc(i  King- 
dom, i8g;    abatements  and  exemptions 
in  Prussia,  228,   230,  ^44.  25i-i'!2:    m 
Baden,   249;    recent   amendments  con- 
cerning, in  Prussia.  J67,   269;    in  fail 
laux's  proposed  tax  for  France,  !22-i24  ; 
in  Austria,  under  law  of  1896,  iM ;  under 
Italian  system.  M2.  344.   U^.  .148-34'); 
under  American  Civil  War  income  tax, 
4.!4.   437,   44I-44,i.   45  5.   455.   457.   470 ; 
mistake  of  making  too  high,  in  case  of 
Civil   WsT  income   tax.   477-     See  also 
Chimrun  and  Exemption. 
Abonnemenl.  practice  of,  in  i8th  century 

France.  50-5 1- 
Act  of   1799.   Knghsh,  78-82;    machinery 
for  administering,  80-82 ;    repeal  of.  by 
Addinglon  (1802).  87-88. 
Act  of  1803,  English.  89  ff. 
Act  of  1806.  101-106. 

.•\dams.  H.  C,  iViVmr  o<  Finanie  liy.  3  n. 
.\dams.*T,  S.,  paper  by,  cited,  427- 
.Addington.  repeal  of  .\ct  of  1799  by,  87- 
88;    income  tai  renewed  by,  in  .\rt  <if 
1803.  8.J  fT. 
Agricultural    prt)fils.    taxation    of   incorr.u 
from.  92  04.  101.  132   '  n.  '  U.  '78.  184. 
321.   i.M;    appliialiiin  of  income  tax  to, 
in  Italy.  345  ;   the  adjudgin*;  of  income^ 
from.  66() -667 
Aid  and  Contribution  Act.  the  v.-talled,  I 

in  England.  "5  ff 
.Mabama.  beL-irming  of  income  taxation  ii 
in  184?.  404    to> ;  (ourse ')(  iiHometax: 
lion  in.  from  1S62  to  l^•<4    4'0   1" 
,M--i.. e  I.-jrritine.  t:ix.:iti'.n  .ivslem  in,   jt/c 
2O1. 


Althorp,  Lord,  rinoted,  119,  12ft 
,\mcndnu'nt  to  the  Con^tituliijn,  the  pro- 

Iiosi-d  Sixteenth,  51^0  IT, 
.Xmcrican    lolmiies,    iniome    tax.ation    ill, 

.('>7  IT. 
.\nhalt,  introduction  of  income  tax  in,  in 

1886,  249. 
Annuities,   taxation  of   income"   from,   in 
Englanil.  77.  94,  95,  104.  i55.  178.  '88- 
i.Sij;    lax  on,   i:nder  Civil   War  income 
tax,  469-470. 
Apiieal  from  iniome  a.^s<;->sment.  Hi,    187. 
188,  3i5;    under  Prussian  law  of   i8<)i, 
2S4-2,S5.   268;    in  Italy,    150   iii, 
.•\rmitage-Smith.  (j.,  <iuotiil,  ^i(, 
.\s<|uitli.  II,  H  .  on  differential  inn,  eame-i 
and  unearned  income-,  and  graduation, 
202-204;    on  increa^  in  rc\i-nue  re'.ull 
ing  from  differentiation,   206  207. 
.\s.sessed  taxes,  in  Kntd.iiid,  j  t,  '«. 
.\ssociation  for  Social  Politics,  the  Ccrtnan, 

A^si.iiations   in   France   in   opiw'iiion   to 

income  tax.  127. 
.\ttwood.  M  .  on  Encli^i  imomt"  tax,  152- 
Auckland.  I>jril.  deftiue  of  I'ittS  income 

tax  project  liv,  77, 
,\ustria,    income    ta'.'.ri'.n    in,     529    9.; 

literature  of  iinonii:  tuxuiiui:  in,   52^  n, 

.See  undrr  In.'ijv  toxaiio'i 
.\verace  sy-t.  in,  .ippli.  ation  -A.  in  Krju'lar.d, 

190-192,  205  ,  in  France,  522  ;  in  .\uslria 

.1J4- 


B 


Habbage,  Charli- 
o<   I'tixntiun   b, 

Bud.-n    .la-  \^\  in, 
i.ixaiion  in.  2i'j  :  < 
ini-ome  tax  in,   245 


/'rinnpl. 


'iuoted,    144 
■I,   ;  i'.: ;    irin.Aati'.n-  in 
r  i7  ;    ^luw    progres*.  of 
lawi  of   1*574  and 
1S76.  248;   enactment  of  an  in' orne  Ux 
in  1004.  J4«:   alterations  in  lax  in  1892, 
I  ^>j^    .>/Xi.  and  I'-O*.    ivi 
Ha-table,  I'ubtu  t-imt.i   '  v,   ?  n. 
li,r.;iri,;,  income  tax  history  in,   237.  24S, 

2')0 

H.ard,   Manson  \V„  on  the  'acuity  tax  m 
Mas»achus<.-tts,  y^i. 


^ 

a\ 
'I 

,>  j 


701 


'W^ 


702 


Index 


Beeke,  II.,  quoted  on  Act  of  1799,  83. 
Belgium,  comrrunal  taxation  in,  in  Middle 

\g?9.  4i. 

Benda,   attitude  of,  toward  income  tax, 

Beni,  income  taxation  in,  356,  357. 

Bielefeld,  C,  cited,  ,;,',. 

Birnbaum,  R.,  work  on  income  tax  by,  24J. 

Blundcn,  G.  H.,  articles  by,  cited,  1 70-180, 
183. 

Board  of  Estimate  and  Apportii  uncnt. 
New  York  City,  28. 

Borah,  W.  E.,  article  by,  on  the  income  tax 
amendment,  5Q0  n. 

Bowles,  John,  cited,  61. 

Bremen,  introduction  of  income  tax  in,  237. 

BroKlio.  Emi'-io,  work  in  behalf  of  Italian 
income  taxation,  340. 

Brown,  A.  Z.,  on  the  Massachusetts  income 
tax,  3Q2-3g3. 

Brown,  Charles  F.,  on  Massachusetts  in- 
come tax,  3q6. 

Browning,  Reuben,  quoted,  I'^i. 

Buchanan,  David,  quoted  on  pft  s  Act  of 
1842,  13S- 

Biicher,  Karl,  cited,  43,  355  n. 

Buckingham,  J.  S.,  quoted  on  a  graduated 
property  tax,  121;  English  income  tax 
advocated  by  (18(7),  126;  quoted,  isS, 

157- 
Bullock,  C.  J.,  articles  by,  535,  541  n.,  550, 

582. 
Bump,  Orlando  F.,  work  by,  460  n. 
Burns,  James,  on  a  graduated  income  tax, 

T83. 
Burt,  J.  G.,  quoted,  171-172. 
Business  tax  in  France,  273-274. 
Buxton,  Sydney,  cited,  S7.   102;    qi  >ted, 

175.  176. 

C 

Caillaux,  Joseph,  on  German  tax  methods, 
263  ;  project  of,  for  income  ta.\  in  France, 
306-307;  income  tax  bill  of,  (1007), 
310-315;  defence  of  his  bill  by,  315-320; 
present  status  of  his  project,  326-328. 

California,  proportion  of  Civil  '  ar  income 
tax  paid  by,  472. 

Cancstrini.  G..  cited,  45,  46,  47. 

Cannan,  Kdwin,  cited,  44. 

Caper.  Ilenry  D..  Lije  and  Times  of  C.  (i. 
Memminurr  by,  482  i\. 

Capital  tax  in  Baden.  J3'>-  237. 

Capitation  tax.  5  ;  the  capilalion  gradufe 
in  France,  50.     .S>f  Poll  tax. 

Cerenville.  '^-I'iss  Taxis  by,  355  n.;  cited 
and  quoteii,  360,  361,  362,  3(13. 


Ces.s,  the,  in  Scotland,  44. 

Chailley,  Joseph,  work?  on  French  income 

tax  projects  by,   277,   293-294;    cited, 

278,  280,  281,  282,  283,  284  ff. 
Children,  abatements  for,  under  English 

income  t.ix  laws,  66-67,  78-79,  97,  I03; 

under   p^nglish    law   of    igio,    212;     in 

Prussia,  252,  267-268,  269;   in  France. 

276. 
Choate,  Joseph,  argument  of,  in  Pollack 

Case,  555-556. 
Civil  War  income  tax.     Sec  under  Income 

taxation,  America. 
Clarke,   Samuel   B.,  on  the  meaning  oi 

"direct  taxes,"  569  n. 
Class  tax,  Prussian,  228-230;    in  Baden, 

236;    the  Prussian,  and  the  classified 

income  tax  of  1851,  239-240;    becomes 

an  income  tax  (18-3),  243;  abolition  of 

Prus.s:an,  250. 
Clear  income,  conception  of,  21. 
Coad,  Joseph,  on  the  income  tax  (1807), 

Cobhctt.  William,  cited,  110. 

Cobham,  Samuel,  on  English  income  taxa- 
tion, 140. 

Cohn,  Gustav,  cited,  27,  247. 

Collection  at  source,  36-38.  See  Stoppage 
at  source. 

Colorado,  revenue  commission  of,  on  state 
and  federal  taxation,  420. 

Commonwealth  Monthly  Assessments,  in 
England.  48. 

Communal  taxation  in  Middle  Ages,  43. 

Compulsory  declaration,  in  England,  195- 
196,  205.  211 ;  in  Prussia,  252-255,  268; 
in  French  bill,  i22-\}i.  324-325;  'O 
.Xustria,  334~335;    'n  Italy,  342,  347. 

Confederacy,  income  tax  in  the,  482  ff. 

Connecticut,  taxc«  in  colonial,  370,  374- 
375  ;  survival  of  faculty  tax  in,  until  1819, 

380. 

Consi.is,  expl.an.ition  of  word,  04  n. 

Constitution  of  Cnitcd  States,  the  direct 
tax  clause  in.  540-550;  the  proposed 
Sixteenth  .Vmemlnunt  to  the,  590  ft. 

Consumption,  laxc^in,  IT-12. 

Cooke.  N.,  so-callni  income  tax  scheme  of, 

73- 

Coo[KTative  societies,  question  of  exemp- 
tion of.  in  Knglaiiii,  ii>5,  189;  in  Prusda, 
2tn. 

Copyrighls,  treatment  of  incomes  from, 
in  England.  18H  1S9. 

Corbetta  commission  of  1872  in  Italy,  34.1- 

CoriK)rate  income  feature  of  income  tax  of 
i8v4,  Si;  513. 


Index 


703 


Corporate  income*,  Uzation  of,  in  Switzer- 
land, 358 

Courtenay,  T.  P.,  on  Pitt's  income  tax,  88- 
8g ;    quoted,  g^. 

Crodcer,  George  G.,  3g4  n. 

Customs  duties,  Englisli,  59-60. 


Dallas,  Secretary,  suggestion  of  a  federal 
income  tax  by  (1815),  430. 

Dauphin's  project  for  France,  295. 

Day  lalxircrs,  exemption  of,  from  income 
taxation  in  Italy,  346. 

Death  duties,  hearing  of,  on  graduation 
and  differentiation,  201. 

Degressive  taxation,  30,  198-199. 

Delaware,  taxation  in  colonial,  378-379; 
survival  of  faculty  tax  in,  399. 

Departmental  Committee  of  1904,  British, 
18s  ff. 

Depreciation,  allowance  for,  in  England, 
189-190,  205-206. 

Dieterici,  C,  cited,  224. 

Differentiation  of  incomes,  21-22,  145,  199- 
200;  Gladstone's  opposition  to,  151- 
153;  problem  of,  in  British  system  (1894), 
180  ff. ;  consideration  of,  by  English 
committee  of  1904,  185  ff. ;  German  sys- 
tem of,  through  a  separate  property  tax, 
200-201 ;  bearing  of  death  duties  on, 
201 ;  adoption  of,  in  England,  in  1907. 
202-207 ;  fiscal  results  of,  206-207 ; 
success  of  income  taxation  m  England  in 
part  due  to,  216-217;  principle  of,  in 
luly,  34S-346;  the  matter  of,  in  outline 
of  practicable  programme  for  United 
States,  670-671. 

Direct  assessment,  German  system  of, 
compared  with  stoppage-at-source  sys- 
tem, 270-271;  system  of,  in  France, 
27,5-275. 

Direct  income  tax,  36. 

Direct  property  tax.   Prussian,   255-256. 

Direct  taxation,  comparison  of  indirect 
and,  by  Gladstone,  165-166, 

Direct  and  indirect  taxes,  discussion  of, 
430-4,?.'!.  535-540;  the  direct  tax  clause 
in  the  Constitution,  540-555;  the  pur- 
pose of  the  direct  fax  clause.  555-559; 
Constitutional  meaning  of  'direct  tax," 
550  ff.:  use  (»f  the  terms  m  the  Con- 
stitutional Convention.  564  ff. 

Discrimination  in  taxation,  principle  of, 
22-25;  GLidstone  on,  151-152.  See 
Differentiation. 

Dividends,  cvuiuliuu  of  the  word,  94  n. 


Dixiemt,  the,  in  pre-Revolutlonary  France, 

51-53- 
Door  and  window  tax  in  France,  273-274. 
Double    taxation,    in    Prussia,     257 ;     in 

American  income  tax  of  i,S(j4.  517-518; 

problems  connected  with,  in  outlining  a 

practicable  income  tax  programme,  647- 

649. 
Dougherty,  J.  Hampden,  paper  by,  590  n. 
Dowell,  Stephen,  citeil,  48,  57,  78,  79,  102, 

168. 
Dunbar,  C.  F,,  article  by,  493  n. 
Duty,  varying  uses  of  the  word,  in  sense  of 

a  tax,  559-560. 


Earned  and  unearned  incomes,  23,  199- 
200;  .\s(|uith's  remarks  on,  203;  defi- 
nition by  English  law  of  igo?.  204  n, 

Edmunds,  Senator,  definition  of  direct 
ta.xes  by,  538  n. ;   article  by,  586  n. 

Elliot,  Jonathan,  the  Dehaks  by,  540  n.; 
cited,  543,  544.  545.  54''  ff  ,  s6o,  568. 

Ely,  Richard  T.,  quoted  and  cited,  372  n. 

Employers,  data  furnished  liy,  as  to  salaries 
and  wages,  205.  247,  268,  iiT,,  343,  664. 

England,  system  of  taxing  things  rather 
than  persons  in  (land  tax.  house  tax.  and 
assessed  taxes),  13;  property  the  crite- 
rion of  ability  in,  in  i6th  and  17th 
centuries,  43-44;  medieval  general  or 
state  taxes  in,  47-49;  the  war  income 
tax  in  (1798-1816),  57-65.  See  under 
Income  tax. 

Equal  sacrifice  theory,  31-32. 

Ernst,  H.,  cited,  35s  n.,  359- 

Esplnas,  G.,  cited,  42,  43. 

Fsslcn,  cited.  355,  359,  363. 

Estee,  Charles  F..  work  by,  469  n. 

Evasion,  the  question  of,  in  England,  192- 
196.     See  Fraud. 

Excise  system  of  tax.itlon,  11-12. 

Excise,  the  general,  In  (icrmany,  223. 

Excises,  English,  in  17th  century,  59-00; 
differing  significations  of  the  word,  560- 
561. 

Exemption  from  fixation,  25-20 

Exemptions,  system  of,  in  pre-Revolu- 
tlonary France,  51;  under  .\ct  of  1803 
in  Great  Britain,  9()-07  ;  un<ler  Peel's 
Act  of  1S42.  13 J -133;  Gladstone  on, 
152;  oi  minimum  of  Milisistence  in 
Prussia,  243,  .'44:  under  Prussian  law 
of  1801,  251  IT.;  In  .\ustria.  333-334; 
under  Civil  War  Income  Ijix.  471;  In 
American  tax  of  1894,  515  517,  523- 
524;    question  01,  under  proposed  Six- 


704 


Index 


teenth  Amendment,  605-610,  614,  615; 
exemption  of  moderate  amount  ad- 
vocated in  outline  o(  a  practicable  pro- 
gramme. 670. 

Expenditure,  as  test  of  faculty,  10-12; 
tax  on,  a:^  supplement  to  income  tax,  17. 

Expenditure  tax,  the  triple  assessment, 
S7a. 

F 

Faculty  tax,  in  colonial  Massachusetts. 
New  Haven,  Connecticut,  Rhode  Island, 
and  New  Jersey,  368-37 1 ;  in  Vermont, 
,i77  ;  in  Pennsylvania  and  the  Southern 
("oloiiics,  377-381,  308  3gq;  not  really 
an  income  tax.  but  simply  an  addendum 
to  early  land  taxes,  38O;  survival  of 
the,  in  early  decades  of  19th  century, 
388  fl. 

Faculty  theory  in  favor  of  progressive  in- 
come tax.  31-32. 

Farming  out  of  taxes  in  Italy,  351-352- 

Fcileral  income  tax.  question  of  state  as 
opposed  to,  642-658. 

Fifteenth  and  tenth  tax  in  England,  47-48- 

Fiftieth,  the,  French  tax,  51  n. 

Fisher,  Irving,  Nature  0}  Capital  and  In- 
come by,  cited,  19  n. 

Flammermont,  J.,  cited,  44. 

Fleming,  William  H..  quoted,  587-588. 

Florence,  income  taxation  in,  in  Middle 
Ages,  45-47- 

Florida,  income  taxation  in  (1845-1855), 

405- 

F" ranee,  text-books  in,  on  Finance,  3  n. ; 
abolition  of  tailU  and  taxes  on  consump- 
tion in,  12;  system  of  real  taxes  {taxes 
r(clles)  in.  13;  communal  taxation  in, 
in  Middle  Ages,  43;  mediaeval  general 
or  state  taxation  in,  49 ;  the  laiUe,  capi- 
tation, dixieme,  and  viHUtieme,  49-53; 
criticism  of  Prussian  income  tax  law 
from,  262-263 ;  history  of  movement 
toward  income  taxation  in,  273  ff.  See 
under  Income  taxation. 

Franco-Prussian  War.  effect  of,  on  German 
tax  system.  241  £f.;  reformatory  tax 
measure-  in  France  after  the,  283  B. 

Fraud,  the  question  of,  in  England,  192- 
196;  remedy  for,  195-196;  in  operation 
of  Austrian  income  tax  law,  337 ;  in 
Italian  system.  343 ;  352-355  :  in  Switzer- 
land, 358-363  ;  in  Civil  War  income  tax- 
ation. 473. 

Frend,  William,  on  direct  taxation  of  in- 
comes. 76-77;  quoted  -3n']  c't*''!,  8^,  99- 
too. 


Fry,  T.  Hallet,  on  evasion  and  fraud,  195 ; 

cited,  214. 
Fuisting,  B.,  cited,  353,  262 ;  discussioD  by, 

of  defects  in  Prussian  law,  264-266. 
Furnivall,  Thomas,  cited,  129. 


Gambetta,  project  of,  for  French  income 
tax,  288-189. 

Garelli,  A.,  cited,  346. 

Gauthier,  A.  E.,  work  by,  321. 

Geering,  T.,  citetl,  43. 

General  property  tax,  conditions  of  eco- 
nomic life  giving  rise  to,  6 ;  shortcomings 
of,  as  test  of  faculty  in  taxation,  7-10; 
features  in  the  history  of,  41  ff. ;  in 
Switzerland,  in  conjunction  with  income 
tax,  355-363 ;  poor  administration  of,  in 
Switzerland,  358;  development  of  the, 
in  Europe  and  in  America,  381-383. 

General  Subsidy,  the,  in  F^nKland,  48. 

General  taxes,  medisval,  47-53- 

Georgc,  H.  Lloyd,  on  rate  of  income  taxa- 
tion, the  question  of  progression,  etc., 
208-211. 

Georgia,  introduction  of  income  taxation 
in,  in  1863,  and  its  failure,  411-412. 

Germany,  text-books  on  Finance  in,  3  n. ; 
system  of  taxes  in,  called  Eriragssteuern, 
13;  communal  taxation  in,  in  Middle 
Ages,  43;  income  tax  in,  223  ff. ;  writers 
on  the  subject  of  income  taxation  in,  247- 
348.    See  under  Income  taxation. 

Gerstner,  S.,  cited,  237. 

Gibbon,  Alexander,  quoted  on  English  in- 
come taxation,  139-140,  159. 

Gillray,  caricature  by,  mentioned,  78. 

Gladstone,  W.  E.,  cited  and  quoted,  63  a. ; 
budget  of  1853,  150-155;  argument  on 
the  income  tax,  151-153;  comparison 
between  direct  and  indirect  taxes  by, 
165-166;  charged  by  Lecky  with  politi- 
cal bribery,  173;  course  of,  toward  the 
income  tax  (1874,  1880,  1884),  I73-177- 

Glattstern,  S.,  study  of  income  tax  by,  242. 

Glover,  George,  quoted  on  English  war  in- 
come tax,  III. 

(ineist,  Rudolf,  quoted,  230. 

Gomel,  C,  cited,  52  u. 

Gore,  Sir  F.,  cited,  191. 

Graduated  poll  tax  in  Middle  Ages,  6. 

Graduation,  of  incomes,  21-22;  of  taxa- 
tion, 29-34  i  problem  of,  in  British  sys- 
tem (1894),  180  ff. ;  consideration  of,  by 
Select  Committee  of  1006.  107:  the  90- 
I      called  super-tax,  198;   bearing  of  death 


Index 


705 


dutic*  on,  101 ;  adoption  of,  in  England 
in  igio,  207-213;  principle  of,  in  Ameri- 
can War  income  tax,  437-438,  440-441, 
444;   by  abatement,  set  Abatement. 

Grttxer,  R.,  cited,  225 

Gray,  James  M.,  cite<l,  623. 

Grey,  Jol-.n,  quoted,  87,  105  n. 

Grist  tax,  the  Prussian,  22i,  238;  abolished 
ai  a  state  import,  243. 

Gross,  Freiherr  von,  income  tax  suggested 

by,  235- 
Guyot,   Yves,   report  on  income  tax  by 

(1886),    29I-2Q2. 

Gyles,  Walter,  quoted,  194. 

H 

Hall,  U.  S.,  article  by,  493  "• 

Hamburg,  introduction  of  income  tax  in, 

in  1866,  245. 
Heathficld.  Richard,  cited,  123. 
Held,  Adolf,  cited  and  quoted,  225,  231  n., 

241,  242,  243,  244- 
Henning,  A.,  cited,  43. 
Henrich,  L.,  work  by,  253. 
Heron,  D.  C,  on  certain  aspects  of  income 

taxation,  144. 
Heslop,  f^uke,  pamphlet  by,  loi. 
Hesse,  introduction  of  income  tax  in,  237, 

24s ;  reform  of  tax  on  Prussian  lines  in 

i8qq,  250. 
Heuschling,  work  by,  277  n. 
Hewitt,  Sir  Thomas,  quoted,  195. 
Hilditch,  R.  on  Peel's  Act  of  1842,  I34-I35- 
Hill,  Joseph  A.,  articles  by,  cited,  225  n., 

257,  430  n. 
Hill,  Senator,  speeches  in  opposition  to 

income  tax,  503,  505,  520. 
Hoffman,  J.  G..  cited.  224,  229. 
Hoffmann,  L.,  cited,  237,  259. 
Holland,  direct  jwoperty  tax  in,  mentioned, 

255- 
Houque«-Kourcade,  citetl,  S',  S*- 
"Hourglass,    Humphrey,"    English   pam- 
phleteer, 84. 
House  tax,  in  England,  13. 
Howe,  F.  C,  articles  by,  cited,  430  n.,  493  n. 
Hubbard,  J.  G.,  quoted,  ibo,  175- 
Hume,  Joseph,  on  taxes  as  confiscation, 
122. 

I 


Illinois,  proportion  of  Civil  War  income 

tax  paid  by,  472- 
Immunities,  certain  mediteval.   25-26. 
Impost,  varying  significations  of  the  word, 

560. 

2  z 


Income,  as  the  test  of  faculty,  15-18; 
weaknesses  and  disadvantages  in  income 
as  sole  test  of  faculty,  151'';  nwcH^ity 
of  supplementing  by  other  tests,  17; 
definition  of,  as  net  income  as  opposed  to 
gross  income,  taken  for  a  definite  pcrio<l, 
19-20;  necessity  of  including  enjoyable 
or  psychic  income,  20;  question  of  dis- 
tinguishing "clear  income"  from  gross 
income  after  deducting  necessary  ex- 
penditures, 21;  the  principle  of  differ- 
entiation of  incomes,  21-22:  earneil  and 
unearned,  23,  199-200,  203,  204  n. 
Income  taxation,  desirability  of  supple- 
menting by  other  forms  of  ta.xation,  17  ; 
difhculties  in  practical  working  of,  18; 
presumptive,  34-36:  direct  or  lump- 
sum, 36;  scheduled  or  collodion  at 
source,  36-38 ;  in  Europe  during  the 
Middle  Ages,  41-53- 

England:   the  war  income  tax,  S7  fl- ; 
Triple  Assessment   Bill   introduced   by 
Pitt,  62-65;    the  .\ct  of   1798,   65   fl,; 
disappointment  in  the  triple  assessment 
and  abandonment  of,  71-72;  project  of 
a  direct    tax   on   all   incomes,   72   ff. ; 
the  Act  of  1790.  78  ff.;    machinery  for 
administering,    80-82;    public    attitude 
toward  the  income  tax,  82  ff.;  repeal  of 
.Act  of  1799  (in  1802),  87-88;  the  .\ct  of 
1803,  8g  ff. ;  .\ct  of  1806,  101-106;  ad- 
mitted success  of,  as  a  fiscal  device.  105  ; 
repeal  of,  in  1815,  106-114;   final  repeal 
of    war    income   tax    (i8i6),    113-114; 
substitutes  for,  in  the  way  of  burden- 
some indirect  taxes.  116  ff.;  arguments 
pro    and    con    (1832-1842),    122-12H; 
Peel's  Act  of  1842,   128-136:    the  de- 
velopment to   1851,    136-145,    Humes 
select  committee  of  1851,  145  ff- ;  Glad- 
stones argument   on,    iS'->53;    ("lad- 
stone's  budget  of  1853.  150-155;    Hul'- 
bard's  committee  of  1861.  161  iT. :  from 
1862  to  191 1.  167  ff.;   (JIadstone's  effort 
in  1874  tn  aMish  the  ta.t.  172 ;  growing 
permar-.iceof,  172-179;  fully  recogniieil 
in  1890.  I  to;  problems  of  differentiation 
and  graduation,   iSo  ff. ;  Departmental 
Committee  of  1904,  185-192 ;   question 
of  fraud,  192-196;   Select  Committee  of 
1906,  196  ff.;  adoption  of  graduation  in 
Kjio,  207-ii,«;   summing  up  of  reasons 
for  success  of,  in  England,   214-218. 

Germany:  literature  of  German  in- 
come taxation,  2^4  n.,  227  n.,  231  n., 
232  n.;  the  class  tax.  228-230;  thetrend 
toward   income   laAiiuun,   230  n. ;    ac: 


i 
i 


7o6 


Index 


vocatwl  (or  Sanony  (i8.ii-i8.)4),  131- 
}.l.f ;  taxation  cunilitiun:!  in  Saxony, 
ajj-j,(0;  from  the  Revolution  of  1848 
to  the  Franco- Prussian  War,  236  fl.;  in 
Baden,  l\<f~ls^  \  intnxluction  of  income 
taxn  in  Huvaria,  Hcsae,  and  Bremen 
(1848),  1ST,  efforts  to  introduce  income 
tax  in  Prussia  (1848  1851),  337-240; 
agitation  (or.  after  Franco- Prussian  War, 
241-242;  reforms  in  the  '70's  and  '8o's, 
14J  ff. ;  Prussian  class  tax  becomes  an 
income  tax  (187.1),  24,5;  slow  progress 
of,  in  Prussia,  24.1-245 ;  progress  in 
Baden,  Wiirtemlwrg,  Bavaria,  and  minor 
Mates.  24S ;  the  Saxon  income  tax  of 
1874,  245-247;  Herman  writers  on  the 
subject,  247-248;  enactment  of  tax  in 
Haiien  in  1884,  248:  adoption  of,  in 
Saxe  Weimar  and  Anhalt,  24g;  the 
Prussian  law  of  i8gi,  250  ff. ;  yield  from 
tax  in  Prussia,  256-257 ;  spread  of  the 
movement  to  other  Clerman  states,  258- 
2t)i ;  criticisms  and  amendments,  261- 
270;  German  system  of  direct  assess- 
ment compared  with  stoppage  at  source, 
270-271;    decided  success  of,   272; 

France  literature  of  French  income 
taxation,  277  n.,  270  n. ;  radicalness  of 
early  suggestions.  278-279;  effect  of 
Revolution  of  1848  on,  278-283;  activity 
looking  toward  income  tax  after  Franco- 
Prussian  War,  283-288;  from  Gambetta 
to  the  Perin  amendment  (1876-1887), 
288-202 ;  Gambetta's  scheme  for  (1876), 
288-280 ;  the  P^rin  amendment,  ii)i ; 
from  1887  to  1804,  203  ff- :  leading  books 
for  and  against  (Leroy-Beaulieu,  Denis, 
and  Chailley),  203-204;  Dauphin's 
project,  2Q5;  Pcytral's  project.  205-206; 
period  of  scientific  discussion,  lieginning 
with  i8g3,  208;  appointment  of  Extra- 
parliamentary  Commission  (1804),  joo; 
Caillaux's  project,  306-307 ;  Caillaux's 
bill  of  igo7.  310-315  ;  Caillaux's  defence 
of  his  project  as  adopted.  315-320;  chief 
provisions  of  bill,  321-325- 

Austria:  early  ephemeral  attempts, 
330; 'introduction  of  income  tax  after 
Revolution  of  1848,330-332;  provisions 
of  law  of  1806,  332-337;  machinery  for 
administering  the  tax,  335 ;  yield  from 
the  tax,  336-337- 

Italy:  literature  of  income  taxation, 
338  n. ;  historical  devt' "inent  of  pres- 
ent tax,  338-345;  mc.iods  of  paying 
t!ie  tax,  347  ;  a-lmirii-nstH-.n  -.f  tax,  3  )•/- 
33.';    amount  of  yield   from  tax,  con- 


trasted with  that  of  England  and  Ger- 
many, J54;  the  question  of  fraud,  jsa- 

355- 

SvUitrUnd:  general  property  tax 
supplemented  by,  35S-J57 ;  administra- 
tion of  the  law,  358  fl. ;  fraud  and  evasion, 
and  generally  bad  result^  3S^j6j. 

A  merka :  the  faculty  tax  in  the  coloniet, 
367-381 ;  income  tax  in  Massachusetts 
under  charter  of  1602,  371-373 ;  faculty 
tax  not  really  an  income  tax,  but  simply 
an  addendum  to  early  land  taxes,  386; 
importance  of  distinguishing  between 
taxes  on  product  and  taxes  on  incomes, 
387 ;  survival  of  the  faculty  tax  in  the 
iQth  century,  388  fl. ;  the  continuance 
of  the  tax  in  Massachusetts  to  the  pres- 
ent time,  38o-3g8 ;  faculty  tax  in  South 
Carolina,  3o8-3gg;  in  Pennsylvania, 
309;  in  Delaware,  399;  in  the  period 
of  the  '40's,  399-414;  in  the  South  dur- 
ing the  Civil  War  period,  406-414 ;  recent 
history  of  state  income  taxes,  414-418; 
outlook  for  the  future,  418-425;  hope  of 
satisfactory  state  income  taxes  illusory, 
419;  adverse  reports  by  Revenue  Com- 
mission of  Colorado  and  Spedal  Tax 
Commmion  of  New  York,  410-425; 
the  impossibility  of  localizing  income 
makes  state  or  local  tax  unworkable, 
426 ;  the  Civil  War  federal  income  tax, 
430  ff. ;  discussion  of  act  of  1861  in 
Congress,  and  enactment,  43i-43S; 
the  act  of  1862,  435-440;  yield  from  the 
tax,  and  suggested  improvements,  439; 
the  act  of  1864,  440-449;  the  model  for 
subsequent  acts,  445-446;  question  of 
permanence  of  tax  after  the  war,  449  ff. ; 
continuance  of  the  tax  for  1870-1871, 
464;  remarks  on  its  expiration  (1872), 
467-468;  proportions  of  Civil  V'ar  in- 
come tax  paid  by  the  several  states,  472 ; 
summing-up  of  shortcomings  of  the  tax, 
476-479 ;  conclusion  that  tax  was  partly 
a  success  and  partly  a  failure,  479-480; 
the  income  tax  in  the  Confederacy,  482- 
492;  origir-  of  the  income  tax  of  1894, 
493-495 ;  introduction  of  an  income-tax 
amendment  to  the  Wilson  Bill,  by 
McMillin,  497-499;  discussion  of  the 
amendment  in  House  and  Senate,  499- 
504 ;  passage  of  the  bill,  505  ;  analysis 
of  the  law,  508  ff. ;  alleged  and  real  de- 
fects of  the  law,  518-529;  the  question 
of  the  constitutionality  of  the  income 
;^^lt,  531  JT  ;  law  drrlarcH  iinmp.s.f!tii 
tional    by    Supreme    Court,    53</-S40i 


Index 


707 


propoKd  SUteenth  Amendment  to  the 
Constitution,  sgo  fl. ;  outline  of  a  practi- 
cable programme  (or  an  income  tax,  631- 
67J ;  income  tax  not  neciled  for  national 
revenue  purposes,  633-635 ;  nor  for 
state,  63s ;  not  needed  (or  purpose:!  of 
elasticity  of  income,  635-636;  nor  for 
purposes  of  justice.  636-641 ;  the  reason 
for  an  income  tax  found  in  the  break- 
down of  the  general  property  tax  in  stale 
and  national  taxation,  and  in  faults  in 
the  tariff,  641-642;  question  of  ad- 
ministration of  tax,  649-653. 

Indebtedness  and  taxation,  g. 

Indirect  taxes  substitutetl  for  income  tax 
in  England,  following  1816,  116  ff. 

Ingenbleek,  cited,  263;  works  by,  320  n., 
540  n. 

Inheritance  tax,  included  in  law  of  i8g4, 
S13-514  ;  queslionofwisilom  of  imposing 
an,  525-526. 

Inquisitorial  methods  in  Prussia,  examples 
of,  263-264. 

Insurance,  deduction  o(  premiums  paid  (or, 
79.  ti3.  IS4-«S5.  156,  Hi,  460-470- 

Italy,  income  taxation  in,  in  early  Middle 
Ages,  45-47;  modem  income  taxation 
in,  338  ff.    See  under  Income  taxation. 


Jiie,  Gaston,  account  of  French  system  by, 

273  n.;   cited,  276,  320. 
Judeich,  A.,  dted,  245- 


Kennan,  K.  K.,  Income  Taxation  by,  3  n. ; 

dted,  252,  49°' 
Kentucky,   partial  income  tax  in   (1867- 

1872),  4»4- 
Kinsman,  DclosO..  income  taxation  studies 

by,  388  n.;    dted,  401,  408,  4og,  411, 

/',12;    quoted,  425-426. 
Knipping,  R.,  cited,  43. 
Koenig,  O.,  income  tax  memoir  by,  205. 
Kolle,  A.,  dted,  43,  223. 
Kretschmer,  dted,  245. 
Kries,  dted,  240. 


Landaff.  Bishop  of,  defence  of  the  triple 

assessment  by,  68-69. 
Land  taxes.  English,  13,  14-15.  49.  58-5v: 

Prussian,  227-2^0. 
Laod  Tax  Commisaoners,  English,  s^S'i ; 


partial    administration   of    income    tax 
by,  in  KnKluiul,  80  Ki. 
Lane,  Jonathan  .\.,  31/1  n.,  394  n..  395- 
LarotheJoulicTt,    »»heme   o(,    (or   general 

property  tax  in  France.  283,  289,  296. 
La.stcyrie,  Charles  df,  litol,  51  n. 
Lauderdale,  Karl  of,  on  the  triple  assess- 
ment, 70-71;   opiiosition  o(,  to  Act  of 
1709,  Si-84. 
Lccky,    ihargo   of   hrilK-ry    preferred   by, 

against  01a<Utoni-,  171. 
Leroy-Bcaulieu,    work    by,    opiiosing    in- 
come tax,  293. 
l«vi,  Leone,  quotc^l,  if)0,  174. 
License  taxes  in  Southern  slates  of  Amerii  a, 

402,  404, 
Limitetl-liability  companies,  taxation  of,  in 

Prussia,  2W)  267,  2tH). 
I,ocal  taxes  in  the  Midille  Ages,  41-47- 
Louisiana,  inaime  tax  in,  41  <. 
LublxKk,  Sir  John,  on  |>ermanence  o(  in- 
come tax,  179- 
(.,UI>eck,  introduction  o(  income  tax  in,  in 

1869,  245- 
Lucius,  Cicrman  advocate  of  income  lax, 

3.U- 

Lump-sum  system  o(  colledlon,  i'l;  mis- 
take of  atiopting  in  case  i>(  ('i%il  War  in- 
come tax,  476;  proiKiscd  for  Ameri.an 
tax  of  i8<;4,  526-527;  has  not  provrd 
as  successful  as  stopiuge  at  source  in  any 
country  extept  (iermany,  65<r-'>6o. 

Luzzatti,  Italian  Prime  Minister,  quoteil, 
35»-JSJ- 

M 

Mack,  H.,  dted,  43. 

McCulloch,  J.  R.,  on  English  income  taxa- 
tion, 1)8-139;   died,  i'j9. 
MattJregor,  John,  quoted.  14?- 
Marlvoxl,  J.  M  ,  on  imome  taxation,  144- 

145 
-McMillin,  ("onicressman,  argument  (or  in 

come  tax  by,  497  4'W. 
MacV'eagh,  Wayne,  artiele  by,  sH<i  n. 
Makepeace.  William,  'icfence  of  Peel's  Act 

o{  1842  by,  I  iO 
Mamrolh.  K  .  liled,  224. 
•Marce,  V  ,  work  on  .\ustrian  income  lax 

by,  350  n.;  lite'i,  355.  357 
Mao'lai'l.    ta.iatl'jn    in    ..-arly.     tjrj ,     at 

lempte<l  income  taxation  in,  In  the  '40  s, 

401-402. 
I  Massathusett'i,  tax  law-,  in  col.jnial.   567- 

369,  380;    survival  of  (acuity  lax  in,  to 

mc  pnricm  Uiy.  j^y^  '.'*--.    —'■■---  -.- 

come  tax  in.  at  present  time,  397- JV''; 


111 


m 


7o8 


Index 


proportion  o(  Civil  War  income  Uz  p*i<) 

by.  47  i- 

MaUoo,  Juhn,  cited,  iitt-120. 

M«u(i»,  K.,  dte<i,  4j. 

Meclilenburii,  taution  mstten  iu  tlie, 
ita. 

Memminger,  C.  (I.,  treaiurer  of  tlw  Con- 
federacy. 481  ff. 

Menier,  sthcme  of,  (or  general  |)roperty 
tax  in  Frame,  >oo,  jg6. 

Meyer,  C,  cited,  4J. 

Middle  Ages,  immunities  in  the,  jj-j6; 
the  income  tji  in  the,  41-53- 

Mill,  Jolin  Stuart,  un  income  tazation,  140. 

Miller,  A.  I'.,  article  by,  4VJ  n. 

Miller,  Samuel,  quoted  on  English  income 
tazation,  ijg. 

Minimum  of  subsistence,  exemption  of, 
from  taxation,  17  'o;   in  Prutaia,  m. 

Minot,  William,  3V4  n. 

Misaouri,  experiment  in  income  taxation 
by.   ii'-iM, 

Morgan,  William,  cited  and  quoted,  H6, 88. 

Morrow,  Owi^hl  W.,  article  by,  541  n.; 
cited,  551,  563,  sgo  n. 

Murhartl,  Karl,  lierman  advocate  of  in- 
come taxation,  231-232. 


N 


".Vames"  acts,  Engli:>h  land-tax  acts  called, 
58 ;  enactment  of  last  .Namei  .\ct  (i8gg), 

184-185- 
Xassr.  W.,  on  Prussian  income  tax,  340. 
.\eatc.  Charles,  quoted,  161. 
Neumann,  F.  J.,  wurks  by,  on  income  tax, 

i\i\   quoted  and  cited,  25,!,  260. 
Newbery,  Francis,  quoted  on  English  Act 

of    1799,   86. 
New  Hampshire,  faculty  tax  in  colonial, 

376. 
New  Haven,  taxes  in  colonial,  3&Q-370- 
New  Jersey,  taxes  in  colonial,  37 1 :    pro 

portion  of  Civil  War  income  tax  paid  by. 

472. 
New  York,  tax  systems  in  colonial,  371- 

372;   assessment  customs  in  i-.irly,  381 ; 

report   of   SiK'cial   Tax    Commission   of 

(1Q07),  quoted.   4:0-425;    one-third  of 

Civil  War  income  t.u  paid  by,  472. 
New  York  (  iiy.   Boarti  of  Estimate  and 

.Apportionment  in,  28. 
Nicholson,  quoted  on  Gladstone's  budget 

of  185?,  150  n 
Noble.  John,  quoted,  170-171. 
North    Carolina,    mtroduction   oi   income 

taxation   in,   in    1849,   403-404;    yield 


from  tax,  406 ;  tazation  in,  during  Civil 
War  period,  40^-409 ;  present  italus  of 
income  lax  in,  410-417. 
Nortlurole,  Sir  Stafiord,  quoted,  IJ7-138. 

O 

Ohio,  proportion  of  Civil  War  income  tax 

paid  by,  471. 
I  )klahoma,  profeiaional  income  tax  in,  418. 
Oldenburg,  inttoOuction  of  income  tax  in, 

in  1804,  >4S- 

P 

Pamphlets,  war  of,  occasioned  by  Act  of 
1790.  in  England,  82-87;  In  aupport  of 
single  income  tax  in  Germany  (1831), 
232 ;  issued  against  income  tax  in  France, 

3J7 

Pamell,  Sir  Henry,  On  Unanciai  Rtjorm, 
119. 

Patent  rights,  treatment  of  incomes  from, 
in  England,  188-189. 

Pebrer,  Pablo,  on  English  finance  and  taxa- 
tion, 123-124. 

Peel,  Sir  Robert,  attitude  of  toward  in- 
come tax,  128-129;  .\ct  of  1842,  re- 
introducing income  tax,   ijo-136. 

i'egler,  E.  C,  cited,  205. 

Pendergast,  George  S.,  on  the  faculty  tax 
in  Massachusetts,  392. 

Pennsylvania,  factilty  tax  in,  in  1778,  377- 
378;  survival  of  (acuity  tax  in,  in  19th 
century,  399 ;  the  first  stale  to  resort  to 
income  taxation  in  the  period  of  the 
'40's.  400;  proportion  of  Civil  War  in- 
come tux  [will  by,  47.'. 

People' s  Blue  Book.  Tk,  158. 

Perdricux,  Pierre,  study  of  fraud  in  Italian 
income  taxation  by,  352. 

Ptrin  amendment,  the,  292. 

Perry,  .\rlhur  L.,  work  by,  quoted,  4''i 

Personal  and  personal  property  taxr^  in 
France,  273-274- 

I'eto,  Sir  S.  M.,  quoted,  169. 

Peytral's  income  tax  project,  295-J96. 

Phelps,  Edith  M.,  Income  Tax  bibliog- 
raphy compile<l  by,  3  n. 

Philippe,  Charles,  work  by,  277  n. ;  <  ifed, 
278,  280,  283,  285,  287  flf. 

Philipfwvich,  work  by,  i.iO  n.;   cited,  248. 

Phipps,  Edmund,  citcil.  144. 

Physiocrats,  distinction  between  direct  and 
indirect  taxes  originating  with  the,  5.15- 

537- 
Pirenne,  H.,  .  iteii,  44- 
Pitt,  William,  introduction  and  defence  of 


Index 


709 


Triple     Anscswnent     Bill    by.     ti  M: 
quoted  on  project  o(  a  direct  tax  on  all 
incumn,    71 -7 J.  74  ^• 
Pollock  case,  arnumcnts  in  the,  5S3-S59. 
Soa-SOi;   menlioned,  sgS,  61J,  6ji,  6j». 
Poll  tax,  the  original  form  of  direct  taxa 
tion,  5;  the  suppUntinx  of,  by  a  prop 
erty  tax,  b;    in   the    Middle  Age*,  4'; 
in  France  in  early  i8lh  century,  50-51 ; 
in  Pru«ia,  »26. 
Poundage,  alKjIition  of,  in  KngUnd,  i<<" 
Presumptive  income  tax,  u   (6 ;  in  Aun     •■. 
j,}8;   in  Italy,  ,)5i;   advantagei  of  tus 
method,  but  impofwhility  of  erecting  a 
system  of  income  'axation  on  this  basis 
alone,  65»-6s<j. 
Printing  machinery,  allowance  for  depre- 
ciation of,  i8g. 
Product  as  test  of  faculty,  .1-15- 
Product  taxation,  defects  c    <ystem,   14- 
15;    a«  supplement  to  income  ta»    17; 
in  Cierman  fiscal  system,  i2i-in ;  under 
PruMian  Uw  of  1801,  257-'58;    move 
ment  toward  substitution  of  innime  tax 
for,  in  France,  370  277 ;  fundamental  im- 
iwrtance  of  distinxuishing  between  in- 
come tax   and,   \il. 
Progressive  taxation,  30  ff. ;    adoption  of 
system  in  F.nRland  (igio).  207-21  i,  317  ; 
compensatory    theory    of,    adopte<l    in 
France,  jio;    in  Switzerland,  J57-358; 
in  proposed  practicable  programme  for 
United  States,  ()7i-672. 
Property  taxation,  stage  of  economic  life 
for  which  adaptc-d,  6 ;    ai  a  supplement 
to  income  tax,  17-    Su  General  prop- 
erty tax. 
Proudhon,  P.  J.,  proposition  of,  179. 
Prussia,    taxation    in,     224     ff.;     dBforts 
toward  income  tax  in  (liUS-iSji).  237 
240;    the  income  tax  of  i8gi,  250  S. ; 
yield  from  income  tax  in,  256-357.     Stt 
uHiirr  Income  tax,  Germany. 
Psychic  income,  20. 

Q 
Quarizius,  opponent  of  German  income  tax, 

Quarta,  O.,  work  on  Italian  income  taxa- 
tion by,  330  n. 
Ijualembtrsteurrn,  Saxon  taxes,  232. 


Ranby.  John,  cite<l,  70. 

Rau.  Kar!  H  .  cited,  iji. 

Kaumer,  Friedrich  von,  cited,  105. 


Real  taxes,  ivMem  of,  in  France,  13;  de- 
fects in  ••yti'  ™  of.  '?■ 

Real  eatate  lax  in  Fr.uHC,  273     74- 

Redfield,  A    .\  .  work  dv    4<*2  " 

Register  or  rolU,  puyiuciit  of  tax  by,  in 
Italy,  347 

Regressive  taxation,  30. 

Keinach,  quoted  on  PrusMaii  law,  262-  20). 

ReineiWe,  W  .  cited.  (3. 

Rent,  deduction  ol.  from  income  tax  of 
i8«4,  5'i-5i2. 

"Resist  or  be  Ruineil,"  pamphlet,  111. 

Retention,  [layment  of  lax  by,  in  Italy,  i  (7 

Revolution  of  i84»,  clTect  of,  on  German 
tax  sysirm,  23*1  IT  ;  imome  lax  scheme'' 
in  France  after  the,  27*  j«  i ;  effect  on 
income  taxation  in  Auiiria,   no. 

Rhoile  Island,  laxes  in  lolonial,  370-17>. 
374-37''.  3'to   iHi. 

Richardson,  James,  quolid,  i2(. 

Rickmaii,  T.  C,  on  Knglinh  inmme  lax. 
85- »o. 

Ripcm,  Lord,  quoted  on  Peel's  A  t  of  iXi^, 

'^' 
RilmuU  di  rivalia.  payment  ol  lax  by,  in 

Italy,   (47 
Roberts,  C.  A  ,  <ilcil,  'H- 
Koche.  Jules,  antagonist  of  imome  tax  in 

I'rance,  3'? 
Rogers,  Thorold.  quoted.  I'x). 
Rose,  (Jeorge,  quoted  on   \a  of  1  7W.  **(; 

defence  of  war  income  Uix  l)y,  loJi-icwj. 
Rubel,  K.,  cited,  43 
Russell,  Lord  John,  quoted,  i  (8. 
Russell,  R.  W  .  on  Peel's  .\ct  of  1842,  i  (S 

lib- 

S 

SacriBc-  theory  in  defeiui-  of  Income  taxa- 
tion, 31-32. 

Salaries,  supplying  of  ilata  ( .m.  irning.  by 
employers,  205,  247.  2O8.     <  i,  54 i.  ''''4 

Sardeman,  F  .  cited,  37- 

Saxc Weimar,  introduction  of  income  tax 
in  (i8»i;.  24c). 

Saxony,  fiscal  -form  in,  m;  enactment 
of  an  inconi.:  lax  in.  in  1H74.  'o  K»  into 
for.  <■  in  in?'*.  245  ^4'  «pe< '«»'  featur.-s 
of  >u\on  l.iw,  24'-  2*7.  mii'iil'iiati.in  o( 
tax  on  I'f'.i-sian  line-    ■.  n/50  u/oi).  !<,'> 

Sayer,  Bciiiarniii.  adsoc^te  of  Knglish  v.. 
come  tax     1  .■  J-1.1O. 

Schafer,  cii.l,  4i- 

Schanz,  <--^l  2i7;  «""'l'  ""  ^*''''  *•"' 
tion  by,   IS"  n 

Schc-duled  in.om.  i.i»    4(^-38. 

Schmidt,  H  ,  cited,  .</ 


u 

li 

J! 


7IO 


Index 


S<'hm<>lk-r,  (i.,  cttwl,  IJ7. 

St'lWinberK,  (i .  cited,  ki,  4.). 

Schiutrr,  Sir  Kelix,  on  the  quMtion  o( 
rvMion.  10.1- 1  u4. 

S.h»r»h,  J  ('.,  iile.1,  48).  iM 

Si-utknil,  molia-val  |>r»pmy  tai  in,  44. 

S»lect  Commillce  of  1851,  14J-MO. 

Sclinman,  Ettayt  in  Tiixiili«n  by.  cited,  4, 
7.  41.  44.  47.  no.  J«.  401,  4".  550; 
Proimut*  Taxation  in  Tktory  am' 
Praclict.  cited,  ig.  »i,  jj,  41,  45.  4g, 
.W.  74.  75.  IM.  IJ'.  J61.  »'''>.  >76,  .Jig. 
.».»!.  .1.11.  .m,  Ml.  .l8»,  40g,  411 ;  Sunty 
article  by,  "The  Knulith  Budxet  Pr»- 
PimaIh,"  jog  n. ;  The  Skiflinf  and  Inci- 
dentf  III  Taxation  by.  citwl,  5j6,  5.17,  668. 

Shearman.  Thomas  O.,  on  A  Jnil  and 
Proititablf  Incomt  Tax,  406;  worit  by, 
citeil.  6)7. 

Shelton.  William  A.,  article  by.  dted.  41 1  n. 

Sherman.  John,  advocai^  of  income  tax  by, 
461,  4h.i-4'i4,  46'>  4f>7;  attituile  o(, 
toward  income  lax  of  i8g4,  $04- 

Siiutle  tax  propositions  in  (iermany,  134- 
lib. 

Smart.  William,  citeil.  65. 

Smee,  W.  R..  citetl.  lig. 

Smith,  Henry  H..  cited,  4,10  n. 

Smith,  Sydney,  quoted,  1 16-117;  re- 
ferred to  by  (iladMone,  166. 

South  Can>lina,  faculty  tax  in  early,  ,170- 
j8o ;  survival  of  faculty  tax  in  igth 
century.  ,»o8-,iQg;  income  taxation  from 
1861  to  1868.  4og-4io:  present  statiuof 
income  tax  in.  417. 

Southern  states  of  America,  early  system 
of  taxation  in,  402. 

Sparre,  Karl  v.,  on  income  taxation,  jj4- 
335 

Special  compensatory  theory  in  favor  of 
progressive  income  tax,  jo-ii. 

Si>iccr.  K.  K..  cited.  J05. 

Stamp.  J.  C,  cited,  214. 

State  income  taxation,  history  of,  ,!88; 
report  of  revenue  commission  of  Colorado 
on,  420 ;  report  of  special  tax  commis- 
Mon  of  New  V'ork.  4}o-42s ;  discussion 
of,  M.  federal.  642-658. 

State  taxes,  medixval.  47-5J. 

Steiger,  J.,  work  on  Swiss  taxation  by, 
355  n.;    rite<l,  ,550,  .?hi. 

Stent,  the.  in  Scotland.  44. 

Stephens.  .Mc.xandcr.  work  by,  cited,  67. 

Stieda,  W..  cited.  43. 

Stoppage-at-source  system,  36-38;  intro- 
.H-.j.-H  ir-,  rr.fU-.-i  ^.'h  A.-t  .-.f  =».-  =  ,  .-fz- 
91 ;  effect  on  yiel-.  from  income  tax  due 


to  introduction  of  lyitem,  08;  the  chief 
cauM-  of  sutccw  of  the  Enclith  Income 
tax,  216;  (rtmun  lyatem  of  direct  uaeM- 
mrnt  compared  with,  170-.?  •■;  id- 
vucatol  by  Calllaux  in  hill  of  ivin7,  312, 
314,  315  ;  in  Italian  system,  347  ;  four- 
tenths  of  tax  collected  by,  in  Italy,  353 ; 
failure  to  adopt  the  principle  a  defect  in 
Ametican  tax  of  iNg4,  516-327;  lump- 
sum not  as  successful  as,  in  all  countries 
except  licrmany,  Ajo-Mo;  special  ar- 
guments In  favor  of,  in  United  States, 
661-661. 

Stourm,  K.,  cited,  51  n. 

StUve.  C,  cited,  4' 

SucccsMon  tax  Uv ;  American,  513-515; 
question  of  the  wisdom  of  a,  525-516. 

Super-lax,  method  of  Kraduatinx  income 
lax,  ig8;  adoption  of,  in  Lloyd  Georite'i 
budxct  of  igio,  209-213. 

Supplementary  property  tax  in  Prussian 
system,  255-256;  ailopted  in  Saxony, 
Baden,  and  minor  stales,  258-259. 

Supreme  Court  decisions  on  income  tax 
laws.  529-530,  571  a. 

Switzerland,  income  taxation  in,  355  B. 
Stf  under  Income  taxation. 


TaUle.  efforts  of  French  Revolution  to 
abolish,  1 2 ;  history  of  the,  in  France, 
49-51 

Tallage  in  medieval  France  and  England, 
49  ff 

Tax  associations,  Prussian,  217. 

Taxation,  Differentiation  of,  22-25;  ques- 
tion of  exemption  from.  25-29;  gradua- 
tion of,  29-34;  progressive,  regressive, 
and  degressive,  30  ff.  See  Income  taxa- 
tion. 

Tayler,  William,  cited,  113. 

Tennant,  Charles,  cited.  145. 

Tenth,  the.  in  France,  51-53. 

Texas,  income  tax  experiment  in  {1860- 
1870),  413. 

Thiers,  opposition  of,  to  French  income 
tax.  284,  286. 

Thomson,  Poulett,  quoted  in  favor  of 
English  property  tax.    118-119. 

Three-year-average  system,  in  England. 
igo-192 ;  provisions  of  English  law  of 
1907,  205;  in  France,  332;  in  Austria, 

334- 
Tooke.  J.  H.,  on  the  triple  assessment,  67. 

ToiT::;:iir:i  cuaiiixisstun  of  1376  in  Italy, 
343- 


• 


Index 


711 


■ 


Trade- unioM,  exemption  u(  inromr*  em- 
ployed for  bencrus,    170.   n'- 

TriUt,  Marcel,  Mcount  o(  French  intume 
tau  ayMem  Ly,  17J  n. 

Triple   aiieument,  orixin  o(   the,   s;  <>s ; 
introduction  o(  Kheme  (or.  by  i'ill,  ftj 
63;    variout  opiniona  o(,   67-7';    '•'»• 
appointment   in  and  abandonment  of, 
7I-7J. 

Tunnell,  (! ,  article  by,  4ut  n. 

Turner.  S.  H.,  citetl.  44. 

Twentieth,  the.  in  France.  si-SJ. 


U 


Uniformity  of  taxation,  11. 
I'niuhart.  W.  Pollard.  OiaUtwt  on  Tina 
titn,  etc.,  cited,   170. 


Vansittart.  Ensliiih  ttateaman,  mentiunc<' 

loi.  106  fl. 
Van  Wervecke,  N..  cited,  44. 
Vaux,  Thomas,  quoted.  114 
Vermont,  tax  law  of  1778  in.  177  ;  survival 

of  the  faculty  tax  In.  in  mlh  century, 

"v  •uels.  allowance  for  ilej)re<iati«in  of,  iH<j 

■  intliimf.      the.      in      |ir<-  Kevolutiouary 
France.  51   5, J 

Virinnia.  faculty  lax  in  (i7W>  i7i/>).  »Ho; 
asuenament  lU  toms  in.  i»i  ;  l^euinninic 
of  income  taxation  in.  in  iK4i.  40i  40t : 
:Teld  from  tax.  40'j ;  inlr€«iiuili'»n  of  a 
real  income  tax,  liurinK  Civil  War  peri  ifl 
(in  littz,.  407  40«  ;  pr-ifiit  law  in.  414 
415;    yield  from  tax,  415  4<'j 

Vjcke.  W.,  cited,  257.  140 
t'oluntary      tontribuiioru      under     early 
Britiah  ait-    Oi,  vH 


w 

Wafea,  data  rrlallve  lo.  furni»hed  by  rni 

(iloyrr^.   ios,  J47.   i'lH.    \t.\,  m,  «i04. 
WaKnrr,  A.  lilnl.  j  |li.   J|7.  '44 
Wakrlirld.  \Ui\W\.  .|U..li.l.  I«j  H7 
Walirlirld.    (allirri,   oil    Ihc    lii|ilr    aMCM 

mriil,  tH)  70 
Waldrr,  J  .  i|Uiilri|.  ny 
Walker,  AniuM,  U-IIrr  lo  Wobiwiki  from, 

'Hi  n 
Wear  anil  tear    .llowamr  for.  In  KnuUud, 
I  go,  JOf 

I,  fj.io  f,5l 
I.  by,  41M   I 


Webb,  Si 
Well* 
Well 
tt 
W' 


,■  I.  I 


iiu.uiua 


li   , 

'                                     AkA, 

■A'.;!    ■   ,      '.    ' 

,                               .ru      1.-         Wkf 

'  1-1 ;  V      ( 

.r   M                   ^ 

^u»triaii 

.,  ,-  ■ . 

,1,1  ....                       iniMwl. 

i 
y,    ...  -  . 

i    ,         all   UHilllon 

(i)i. 
!  Wilxin,     1 

..    ,.'•      <,}          J  /hall     ili- 

<  on»- 
!  Wolf.   Jul.u 

., .   :^..^.,./ii   iii   Sn.ii«rUi»i), 

1      )v; 

,  W.<lo»ski,  Fl 

.mil   iTi.'illii   l««   ixojr.'te    of, 

i  Wurtfnib.ifK. 

(«ur»  ot  luroim  t«jialv>ii  id. 

1        iV)    '*^ 

/, 

Z«-umer.  K  ,  liiwl   41 

Zicttlel.  M»y>if,  ijr'»K"-i«>iv»  im.'jmr  i»«  lor 

Zuritf     li*»i        i../i.4]ii'..iit  111    iSV.  5^ 


tl 


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mm 


BY  THE  SAME  AUTHOR 


m 


Owen  and  the  Christian  Socialists.      1886. 

Railway  Tariffs  and  the  Interstaie  Commerce  Law.      1887. 

Principles  of  Economics,  4th  ed.      1909. 

Russian  translation,  1907  ;  Japanese  translation,  1907. 

Essays  IN  Taxation,  6th  ed.      191 1. 

Russian  translation,  1909!   French  translation,  191 1;   Mahratli 
translation,  191 1. 

The  SmniNG  and  Incidence  of  Taxation,  3d  ed.      i9«o- 

Italian  transhliuii,  l<)o6;  Japanese  translation,  1910;   i-rcnLh 
translation,  191 1. 

The  Economic  Interprctation  of  History,  2d  cd.      1907. 

Japanese  translation,  1905;   Kussian  translation,  1906;  Span 
ish  translation,  1907  !   French  translation,  1910. 

Proc.ressive  Taxation  in  Theory  and  rKAciicE,  2d  ed.      1908. 
French  translation,  1908. 


<f 


Essays  in  Taxation 

By  EDWIN  R.  A.  SELIGMAN 


Profesior  of  Political  Economy  and  Finance  at  Columbia 
University;  author  of  "  The  Shifting  an.l  Incidence  of 
Taxatitn"  and  of  "The  Economic  Interpretation  of 
Historyr  published  by  the  Columbia  University  Press, 
».  Principles  of  Economicsr  "Progressive  Taxation  in 
Theory  and  Practice,"  etc. 


<.Bv  far  the  best  writer  on  American  taxation.     His  work  is  among 
the  very  strongest  in  any  country.     With  such  scholarly  leadersh.p 
reform  may  come  in  a  conservative  and  rat.onal  rather  than  m  a 
revolutionary  way."  -  BtbUotheca  Sacra,  Chicago. 
"  No  student  of  finance  will  feel  that  he  has  a  right  to  an  opinio,,  until 

he  hxs  read  whatever  Professor  Scligman  may  have  written I  he 

volume  constitutes  the  most  important  contribution  to  the  science  that 
has  yet  appeared."  -  Annals  of  the  Americn  Aca.temy. 
.One  of  the  few  economists  who  have  mfluence.l  the  politicians. 
Every  one  will  feel  the  reason  of  this  inriuence :  there  is  a  hne  grasp 
of  principles ;  there  is  a  close  contact  with  facts  ;  there  is  a  constant 
testing  of  the  one  by  the  other."  -Nature  (London). 


Cloth,  8vo,  gilt  top,  bound  in  buckram,  tj-OO  net 

Sixth  Entlisk  cditUsn,  s.n;  Hu.si.n  ,r.n.Uiion,  s„.,;  French  translation,  t,u ; 
Makratti  translation,  1911 


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Outlines  of  Economics 

By  KiCHARl)  T.  tLV,  Ph.L).,  I.L.I)..  Professor  of  Political  Economy  in 
the  University  of  Wisconsin.  Revised  anil  cnlargcil  by  the  author,  and 
Thomas  S.  Atlams,  Ph.U.,  Professor  of  Political  Kconuniy  in  the  Uni- 
versity of  Wisconsin;  Max  ().  Loren/,  Ph.D.,  Assistant  rrofcssor  of 
Political  Economy  in  the  University  uf  Wisconsin;  AlKn  A.  Young, 
Ph.D.,  Professor  of  Political  Economy  in  Leland  Stanforil,  Jr ,  University. 
Published  in  New  York,  1893.     New  edition,  1908. 

i  iolh.  yno  pp.,  Jj.oo  net 

Such  is  the  lucidity  of  the  style,  so  free  is  the  treatment  fmm  [Mrs.  nal  iilio- 
sym  rasics,  and  so  logical  and  well  ordered  is  the  arrantjenienl,  tliat  the 
beginner  has  little  clilTiculty  in  getting  a  dear  anil  comprehensive  iinneption 
of  the  entire  subject.  He  is  enabled  to  do  this  the  more  readily  by  the 
wealth  of  practical  illustrations  from  the  problems  of  the  ilay. 

Principles  of  Economics.      V^ol.  I 

By  AlfrkI)  Marshali,  I'mfessor  of  Political  Economy  in  the  University 

of  I'ambridge. 

Published  in  London,  1890.     Fifth  edition,  1907. 

Cloth,  870  pp.,  Svo,  $^.7j  net 

A  History  of  Political  Economy 

By  John  Kki.i.s  Inckam,  I.I..1).,  Fellow  of  Trinity  College,  Dublin. 
Published  in  New  York,  1907. 

Cloth,  ijo  pp.,  umo,  $i.j(>  II,  t 

An  expositi'ii  of  the  historic  development  of  economic  thought  in  its  relatiims 
with  general  philos>iphic  ideas,  rather  than  an  exhaustive  aeciiint  of  economic 
literature,  although  all  the  really  importlRit  works  on  the  science  are  noticed. 

Dictionary  of  Political  Economy 

Edited  In-  R.  11.  lNi;i.i-  P\u;kA\K,  F.R.S. 

Published  in  l.rndon,  1894-9.    Corrected  edition,  with  appendix,  1906-9. 

Thrif  riiliimfs,  ilolh,  Svo,  tarh  $6.jo  net 

Volume      1.   A  -K,  800  pages. 

Volume    II.    F M,  S4S  pages. 

Volume  HI.    S-V,    ,SSi  pages. 

A  scholarly  work  covering  the  entire  held  of  politiial  1 1  onomy,  containing 
ample  and  tru^tuorthv  information,  an  abundance  of  veriiied  doeuments,  and 
a  bibliography  of  iuestimalilc  \alue. 

History  of  Coinage  and  Currency  in   the   United  .States, 
and  the  Perennial  Contest  for  Sound  Money 

Hy  A.  Barpos   Hn'iii'KN. 
J'ublished  in  New  ^  ork,  nxjj. 

Cloth,  666  pp.,  A'lw,  J.'.fi.)  11,1 


!    i 

I : 

I  i 


An  Introduction  to  I'uiuic  Finance 

l!y  Caki.  C.  ri.KllN,  I'li.l). 


Third  tJilioii,  oilar^nl  ,ni,l  i'arll 


,tU-«.  I'  7i  «'' 


"The  book  as  it  lirsl  ai>|)t.'aL_  - 

usefulness  has  Ikh  n  i-i.atK  cnliam.-.l,"  Hays  il.i   /.."-«.'■ 

"At  present  the  l>csl  text  on  iiublii:  linam.-  I..r  mm.il   u^<-.         / 

Sdfnce  Quarterly. 


Public  Finance 

Hy  C.  K  lUsTAlil.K,  M.A..  l.l.n.,  rr..frv,.ir  of  l'.,lili.«l  I  ...«., u..   ii.  iK. 
University  uf  Dublin. 

ruhlishcd  in  l.uml.jn,  iS.j2.      \\w'\  '■■Uu i-><M 

(.'lotli.  /Si)  pp  ,  .Vvu,  tl  -■-,  iltl 

Practical  Problems  in  Banking  ami  ("umiuy 

IViny  a  numln-r  u(  seln  I.  .1  a.|.|..  ■,-,.,  -I.  iiv.  m  ■!  in .'  /■■■■^  Uy  ),c,iin 

nent  hank.rs,  hnanu.rs,  an.l  .-,n..n..s!-.      I..i,...|l.v    .'.  -i  u  i.    111-.^'- 

llni..    Wuhan  Intr.Mln.  li.,n  l.y  fh,-  II. .r.  <     I.  \'nin  ■.:■  ,..!  N.-w  V..il.- 

I'ul.hshe.l  in  New  York,  iy.7. 

Lll'ltl    ;</)  PI'     ■■•■-"    ii  i"  I"' 

A  compilation  uf  a.l.lrcsi-s  .ieUverH  siii' ••  l<)""  I"  f""'  »"■■'  '"■'"»  ■••'■"''' 
crs  llir.ughoul  the  country.     I  lie  a.l.lu -.«»  ai- jji  .Ji,-:  n.   .  .  !!■   l-..l'..Mrii^ 
heads:  (.cneral  Hanking;;  Uanitiiij;  K.r,rn.  andi  an.i,   ..      1...="     uii -....,, 

The  Nature  of  Capital  and  Intoint- 

l',y    IKMN..    I-l^lIU',    I'h.I).,    I'pfesv.r    cf     I'lu.-..!     I.^-n'-ny    in    V.i<- 

L'niversiiy. 

I'ublishe.i  in  NV*  York,  l<//i. 

This  work  jiuts  on  a  rational  fouii'luion  ihe  ■  '.«•  .-pis  ui.'  11  .-,•l>ll,^  ■  <  ■  »;•  i.^ 
and   mcoMie.     TrtalUi^;   llie   fun'ianirnt^ii  coii'-j/-.  -I    !       n     '         '   "•"  ^ 
wealth,  prurjtitv,  srr\i.  cs,  caiiital,  ai'on,^,  ni"i'5'.  •'■  •'      -i.-oii;'       > 

relat-ris  sul;MMin,;  bet^.en  tb-»r  .  ..!.ce|As  »;;■!  h.-«  '  !.rv  f  u'lvnt  ." 
uncuuv.ioui.ly  observed  in  i;r.:  'i.ai  i.^ckkt.  ;;iiiis. 'i.c  y^  '  .cfii.:  .  .V  ■. 
j.hiloss^j.hy  of  economi.  a'       •     .uj; 


MoneY 


A  '^tui-.  '.f  -h^  •nic'-r;.  cf  ''.-  M^-'  ■-■>.  ■  '  !:>    '     !  y       ' 

I'.ofevvr    -f  Kcvir-in--  ar  ■  Ii.-.nof  !•..   '  c'-V    •'    ' 

.11  ihe  Vi:\'  n;'}  •■(   1  •  •■''-:'■ 

I'JMht :  -n  >e-.>  '1  •  ",  v/^i- 

II  :■    •-■.'■'    ;■     y, 


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'(,T    Hi'  t.'.tory    ^.^'•v     '^    ..■■'.»,•;.".   i  •• 
•ii'    '\  'f  •ih<  »alue  •  f  inoi.' ;>       ■^' ■»   v    ■'" 
u.i  ;■;    1^  \' '■  fun' "1  'n^  '^   "'■    '■•-»    'h"-  ">«■'  '•'■' 
u*inr:'%      '    rii   T-' V    ii.    i*  lu'.-  n    '. .     's    ^*-\*'. 

,..  ^  !':eIlVfc 


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t.fi  .>(  n'     it     ■  ■■!ii»*s*.'-!l' 
«.,.■    '      i'        1.       S'.ii'' 


The  Purchasing  Power  of  Money 


A  study  of  the  causes  determining  the  general 
level  of  prices.  An  explanation  of  the  rise  in 
the  cost  of  living  between  1896  and  1909. 


By  Irving  Fisher,  Yale  University,  author  of  "The  Rate 
of  Interest,"  "The  Nature  of  Capital  and  Income,"  "A 
Brief  Introduction  to  the  Infinitesimal  Calculus,"  etc. 


In  this  important  work  are  discriminated  for  the  first  time  the 
five  groups  of  magnitudes  upon  which  alone  the  purchasing 
power  of  money  dejiends. 

The  amount  of  money  in  circulation  is  more  accurately  deter- 
mined than  ever  before ;  the  figures  for  the  amount  of  l'(jnk 
deposits  subject  to  check  are  entirely  new.  By  an  original  metliod 
of  ascertaining  the  velocity  of  circulation  of  money  (explained  in 
the  Jour*ial  of  the  Royal  Statistical  Society  for  December, 
1909),  Professor  Fisher  has  arrived  for  the  first  time  at  a 
reasonably  exact  estimate  for  that  hitherto  unknown  clement ; 
his  figures  showing  the  velocity  of  bank  deposits  are  the  first  <if 
this  kind  ever  published  in  the  United  States.  The  figures  for 
ihe  vc  me  of  trade  are  constructed  by  the  method  of  ProfL:--iir 
Kenv  trer,  applied  with  added  elements  and  more  detail  ami 
labo        the  computation. 

F-  le  theoretical  point  of  view  the  book  is  conservative.  ;i 

c  X\ox\  of  the  older  theories.     From  the  practical  point 

ifw  it  touches  a  live  subject  and  will  be  found  exceedingly 

esting,  and  incomparably  valuable,  by  all  students  who 

are  interested  in  the  present  rise  of  the  cost  of  living. 


PUBLISHED    BY 

THE  MACMILLAN   COMPANY 

6t-«6  Fifth  Avenue,  Hew  Tork 


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